Is the S&P 500 heading towards trouble?

Kate Leaman
Kate Leaman

3 April 2019

Over the last several months, we have seen an extraordinarily strong S&P 500 coming out of the United States. The market bottomed on Christmas Eve, and has shot straight up in the air since then. While it has been rather impressive, the reality is that these types of moves cannot last forever, so we need to start looking for the exits in case trouble happens.

Triple top? Head and shoulders?

When you look at the weekly chart, you can see that there is an area around the 2900 level that has been trouble in the past. By highlighting this area, you can see that there is a little bit of an area that could be thought of as a triple top, or possibly a head and shoulders if you use very liberal definitions. Overall, the one thing that is sure is that the trajectory of the move higher has been overdone, and although we have broken through rather significant resistance in the form of 2800, we have yet even more problems above that could come into play and cause fits.

S&P 500 chart

S&P 500 weekly chart

Previous trend line

When we had been in the uptrend before the break down late last year, there was a nice trend line that was obvious for most traders to pay attention to. We are now approaching the bottom of the trend line and could see a bit of “market memory” come into play, pushing the market back down as we approach the bottom of that trend line. What’s even more interesting is that it coincides nicely with the 2900 level, which of course is where we have seen a lot of selling, and of course is also a large, round, psychologically significant figure. Quite frankly, when you get these many big reasons in one spot, you would have to think that there is a lot of profit taking waiting to happen, and of course flat out selling.

With that in mind, it looks as if the 2900 level could be crucial as to whether or not the market can continue to go higher. This doesn’t necessarily mean that we are going to collapse from there, but rather we are going to struggle there. That’s a key distinction to be made here: it doesn’t look as if the market is going to fall apart it just simply looks as if it has gotten too far ahead of itself.

Federal Reserve and economic announcements

At this point, it appears that the global economy has been slowing overall. We are starting to see slightly better figures out of China as they stimulate their economy, so that of course could help the situation. At the same time, US numbers have fallen a bit but the Federal Reserve has suggested that the central bank will be raising interest rates this year, so that has helped as well. However, most pundits recognize that we are more than likely heading towards a recession, perhaps in 2020 or maybe 2021. There comes a point where the market starts to focus on the future, and once it does that will probably be when things turn around. Ultimately this is probably what is going to turn the market.

In the meantime, you should be aware that we are heading towards an area of extreme resistance, so if you are still bullish of the stock market you are probably hoping for a pullback to find a bit of value.

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