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Talking Points:
- S&P 500 Technical Strategy: Flat, bull-flag opens door for long-continuation setups
- Should downward trend continue through support, this bias can turn bearish very quickly.
- As markets continue to price-in a December rate hike from the Fed, watch for weaknesses in risk-trends, such as the SPX500.
In our last article, we discussed near-term resistance at the 2,100 level as the S&P had just ratched higher by more than 10% in less than six weeks. Then came NFP, and for all intents and purposes, the report blew even the wildest expectations out of the water, and most of the numbers throughout the report were bullish. American Non-Farm Payrolls added 271,000 jobs verus an expectation of 180,000, and this firmly supplanted those rate-hike odds for December, as expectations increased to as much as a 72% probability of a hike.
But is this what risk assets really wanted? Markets really started their major descent in August after the minutes from the July Fed meeting leaked early, and showed significantly more dovish than the stance Ms. Yellen had taken earlier in the summer when testifying in front of Congress. And when we did get to September, and when the Fed backed down in order to ‘monitor international developments,’ the sell-off really worsened as now the world’s largest national central bank looked like they had no idea what they wanted to do. The day after that meeting, we wrote the article Are Global Markets Losing Confidence in the Fed?
The sell-off in the S&P continued to the end of September, but eventually the synergistic forces of ‘looser for longer’ combined with additional stimulus out of China with the expectation for an increase in stimulus out of Europe were enough to bring back the stock-buying bonanza that has become normal over the past six years of ZIRP-fueled gains.
Now with expectations for December firmly planted, investors are left asking ‘what’s next?’ And not coincedentally, since seeing these December expectations rise and after that blowout NFP number, we’ve started to see the S&P selling-off, creating a very comfortable bull-flag formation. We discussed this in yesterday’s Market Talk entitled, S&P Downward Channel: Bull-Flag or is a Top in Place? And as mentioned in the article, the bull-flag formation is a bullish trend-continuation pattern. So, as long as prices remain supported, the bias in the S&P remains bullish.
But it’s the potential breaks of support that make the S&P so utterly interesting right now. For support, we’re looking at the same Fib setup that’s defined much of the price action in the market since China’s Black Monday saw a low of 1,833.50 come in to the S&P. This can be found by simply drawing a Fibonacci retracement from the 2,137.1 high to the 1,833.50 low, and you’ll notice numerous levels that have seen significant support and resistance over the past two months. At 2,065 we have the 76.4% retracement, and this is where current price action appears to be eliciting buyers. Should this level give way, look for support at the 2,021 level, which is the 61.8% retracement of this move (and also the exact top when we had that leaky Fed minutes report in August). Should 2,021 give way, look to the major psychological level of 2,000, followed shortly thereafter by 1,985.30, which is the 50% retracement of this most recent major move.
Should price action break below any of these levels, stance can slowly begin to shift to bearish based on how aggressively one wants to hit the move.
Alternatively, the up-side here is the most attractive given the veracity of this recent trend, and the bull-flag formation can help with entry. Traders can enter with stops wedged below support at 2,065, and targets set to the most recent swing-high at 2090 to offer a 1-to-1.5 risk-to-reward ratio… but a target at 2,100, traders can look for a much more attractive 1-to-2.5 risk-to-reward ratio on the long-side setup.
For those looking to treat the setup more conservatively, you can wait for price action to break out of the flag to prove that buyers will be able to reverse this short-term bearish trend. Tomorrow’s candlestick projects to approximately 2,082, so should prices break above the down-trending channel to find support in this region, that could be another long-continuation setup with an initial target at 2,100. After that, 2,115 becomes a level of interest (Monthly high), followed by 2,125 (minor psychological level) and then 2,137 (all-time high).
Created with Marketscope/Trading Station II; prepared by James Stanley
--- Written by James Stanley, Analyst for DailyFX.com
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