What’s inside:

  • S&P 500 negates previous topping scenario, record highs very near
  • The question is, will we see a breakout, double-top, or more range price action?
  • Outlined are signposts to determine which it might be, and tactical suggestions

Could the stock market be nearing a major high? See our Quarterly Forecast for our outlook.

The other day we were discussing potentially bearish price sequences in both the S&P 500 and Nasdaq 100, but both needed to stay below key levels in order to keep that bias intact. Such was not the case as we saw global markets pop the past couple of sessions. The rally doesn’t quite get the bulls off the hook just yet, as range-bound conditions or even a possible double-top could develop in the S&P.

There is no denying the longer-term trend is firmly higher, and finding ‘the’ top is not an exercise we are interested in partaking in. But even with that said, we could soon see another turn lower that offers shorter-term-minded traders an opportunity to take advantage of price weakness. The S&P is on approach to record highs at 2454. If we see a rejection around that level it could signal a move back towards 2405, continuing a range-trading environment, with an opportunity for shorts. If a move lower develops towards 2405 we would then become cautious on bearish bets and watch how the market responds to this important support level (it could also be in confluence with the December slope). There might be a long-trade in there as the range remains and buyers continue to keep the market propped up.

If, however, we were to see the 2405 level break, then it could be game-on for the bears, as we receive confirmation of the double-top. But not to get ahead of ourselves, we’ll first focus on the resistance level quickly approaching and go from there. If the S&P can gain traction through the record high on a daily closing basis, then the continued range scenario would be undermined. However, it wouldn’t necessarily be a sign that it is time to ‘get all bulled up’, as buying breakouts in equities has long had a history of burning those who paid up for new highs. Furthermore, there is a top-side trend-line extending from the March 1 high over the June high, as well as the under-side of a slope rising up from the November low. This could put a lid on the market, even if for just a short while. A clean breakout, though, could present a pullback trade to enter long if the market were to then hold the prior record high as support.

The bottom line is that volatility is low, as evidenced by a 10-handle on the CBOE Volatility Index (VIX), which can make for difficult trading. Expectations need to be tempered. But there are scenarios which could lend themselves to taking advantage of the price action we are seeing.

On Tuesday, in the weekly “Indices & Commodities Analysis for the Active Trader” webinar we’ll discuss new developments in detail.

S&P 500: Daily

S&P 500 Approaching Record Highs Lends to a Couple of Possibilities

Paul conducts webinars every week Tuesday-Friday. See the Webinar Calendar for details, and the full line-up of all upcoming live events.

---Written by Paul Robinson, Market Analyst

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