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The S&P 500 Bulls Are Readying Their Response

Written by: Monica Kingsley

Stocks have invalidated their breakout above the 50% Fibonacci retracement. Apart from this key development, what else can we deduce from yesterday’s price moves around stocks? And in light of today’s premarket upswing, would these indications stand the test of time later today? 

Let’s start with the S&P 500 daily chart (charts courtesy of http://stockcharts.com ).

S&P 500 in the Short-Run

Prices opened with a sizable bearish gap and no serious attempt to deal with it to speak of. With the sellers on the initiative, stocks kept moving lower throughout the session despite two intraday attempts to retrace a portion of the preceding decline. The final 30 minutes show that just as on Monday, there was a bearish close to the session. That’s the opposite of last week’s action before the closing bell, and a bearish omen for the near term.

With yesterday’s downswing, the daily indicators’ posture has clearly deteriorated. While that’s encouraging for the bears, it may still take a while for the downswing to accelerate. Actually, it might take a pause as there’s one good fundamental reason for it, and we’ll discuss it further on.

Let’s check the key credit markets’ metric next. Despite the Fed’s scope of interventions having broadened earlier this month to include corporate credit instruments as well, the message has to be reckoned with. As we looked into the Fed’s move in real-time, we’ve highlighted the waning bang for a buck that this intervention has bought in the many credit markets. So, how is the high yield corporate bonds to Treasuries ratio doing?

The Credit Markets’ Point of View

Another bearish gap and another move lower that’s driven by the high yield corporate debt (HYG ETF) decline that happened on high volume to top it off. Our yesterday’s point about the defensive nature of the preceding S&P 500 rally remains valid. Simultaneously, we’ve mentioned the strong showing of the technology sector (XLK ETF). 

Once we check its yesterday’s performance, we’ll examine the financials (XLF ETF) as they could be reasonably expected to move up in light of the much-touted yesterday’s fundamental news.

Technology and Finance in Focus

The sizable bearish gap and intraday momentum on relatively high volume doesn’t paint a bullish picture for the days to come. Will the bulls be able to mount a strong response and close yesterday‘s gap?

Financials gave up their early gains and closed near the daily lows. The overall intepretation of the daily indicators‘ message is rather neutral (in other words, not precluding a short-term upswing) but over the medium term, the risks to the downside remain higher than to the upside.

The Fundamental S&P 500 Outlook

Yesterday, we’ve expanded Monday’s flagship Stock Trading Alert’s perspectives with the examination of the monetary policy outlook for this week. As for fiscal policy news, the Senate approved almost $500bn small business and hospitals’ aid package yesterday. Yet that didn’t help the financial sector, and neither healthcare (XLV ETF) benefited. 

Is today’s premarket upswing reaching 2775 a case of buy the rumor and sell the news?   

We’re of the opinion that today’s upswing is going to run out of steam shortly, and won’t materially change the below perspective as described in today’s Gold & Silver Trading Alert:

(…) In Tuesday’s analysis, we wrote the following two paragraphs about the breakdown below the rising support line:

The breakdown below these lines is a major bearish sign and something that is likely to lead to further deterioration in the stock market. As the protests against the lockdown keep popping up, the odds for the end of the lockdown actually decreased, as people participating in the protests usually don’t wear masks and don’t adhere to the social distancing rules. The same with Florida beaches. And there are countries when things are even worse with regard to social distancing violations.

All this increases the news-based odds for a decline in the stock market and a rally in the USD Index. However, the above chart – and the breakdown – provide the technical evidence that the next decline is quite likely already underway.

Wednesday morning, we see that the breakdown did indeed lead to lower stock market values. Stocks have now paused at one of their previous lows, but it doesn’t seem that this low would be able to hold the decline for much longer.

What is not clear at first sight, but is actually important, is that stocks are now moving back and forth below the April 7 high. Once the breakdown is verified, we should see a quick slide to the following low that coincides with the Fibonacci-based retracements – at about 2,630. The next stop would be the April lows that coincide with the 61.8% Fibonacci retracement at about 2,440. 

As the S&P 500 futures are trading at around 2775 currently, that’s well above the April 7 high. It’s highly likely though that this bounce just anticipates the fiscal policy move and doesn’t pose danger to the breakdown below the rising support line. In other words, the breakdown stands a very good chance of not being invalidated.

Summing up, the S&P 500 rolled strongly over to the downside, and the bulls are staging a rebound as we speak. On one hand, we have the Fed’s taper of asset purchases, on the other, there is the new fiscal stimulus making its way through Congress. The breakout above the 50% Fibonacci retracement has been invalidated, and today’s upswing hasn’t changed that. The credit markets continue to underperform, and the formerly leading S&P 500 sectors have moved decidedly lower yesterday. The S&P 500 bulls are likely to remain on the defensive throughout the week as the coronavirus death count is rising again after a short reprieve (where does that leave the reopening?), and a new batch of earnings strikes today (unemployment and manufacturing data will do so tomorrow). The balance of risks favors a move to the downside to continue, and our short position remains justified.

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