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S&P 500 Pulls Back to Support and Holds; Rip to New Highs or Consolidation Next?

S&P 500 Pulls Back to Support and Holds; Rip to New Highs or Consolidation Next?

What’s inside:

  • S&P 500 holds eyed support levels, turns higher
  • This keeps the trend pointed higher as long as support holds
  • How the market comes out of a low will help guide us towards whether to expect a rip to new highs or a period of consolidation

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The pullback off the highs in the S&P 500 has been a gradual process, with yesterday demonstrating characteristics of a short-term capitulation bottom. It wasn’t anything earth-shattering, but the ‘dribble’ lower over the past week ended in a relatively sharp drop and reverse in the afternoon session, suggesting the worst is over for now. The daily low came very near horizontal support from the end of February and a retest of the Feb ‘16 trend-line we have been working with the past few months. Also, very nearby is the trend-line running up from the November low. The market didn’t quite reach that point, but it may touch off on it at some point soon. Nevertheless, the stop and reverse from other noted support levels should be enough to keep a floor in for now. A break below yesterday’s low and the November trend-line would of course change this outlook.

How the market comes out of yesterday’s low should help provide us with insight as to whether we will see a strong resumption of the uptrend or entering a period of consolidation. A strong initial surge would suggest the former. However, a period of horizontal work would be a positive development for setting up a rally later on. For now, the bias is higher to side-ways at the worst, with clear support levels/lines in place to operate off of.

Heads up next week: FOMC rate decision on Wednesday could spark volatility. The market has already priced in a 25-bps hike, so it’s likely that if volatility is to stem from the meeting, barring a 0 or 50 bps move, it will come from the Fed’s statement and forward indications. A big NFP miss today may cast a shadow of doubt prior, but not looking like the most likely scenario at this time. (See the economic calendar for details.)

S&P 500: Daily

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---Written by Paul Robinson, Market Analyst

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.