Last month, I spoke about how the “current market seems range bound,” and it appears to still be the case this month. In this newsletter, I want to dig deeper into the range and the components that I am closely watching.
Trading ranges are typically very important to technical analysts, or chart watchers. They look for generally agreed upon trends and levels that normally provide support or resistance for the market. “Support and resistance” is a concept that predicts the movement of a security’s price will tend to stop and reverse at certain predetermined price levels. Sometimes these are round numbers that can be psychologically significant, like 2700, and sometimes they are more sophisticated like moving averages. Typically, once you break through a number that has been a resistance point, that level will serve as temporary support going forward. And, the more times it fails to break through a certain level, the more significant that number becomes.
This brings me to the levels of the S&P 500 that I feel define this range. The following levels have provided resistance and/or support in recent months:
2786: This number is significant because it is the level where the market topped out in February, and again in March, before falling sharply to the 2700 level. Eleven days after I posted last month’s newsletter, the S&P 500 again closed at 2786. Then the same thing happened: the market sold off sharply to 2700.
2700: This number has served as both resistance and support at least half a dozen times since February. It held as a nice support level after falling from the highs in Feb and March. However, once the level was breached it became a harsh resistance level that kept a tight lid on the market until May. This level then served as a battleground until breaking above, where it has now become a strong level of support.
200-Day Moving Average: The 200-day moving average (MA) is the level I am watching the closest. This is one of the most widely viewed (if not the most widely viewed) technical metrics available. Because of this, the 200-day MA has proven to be superior support during each of the most recent market declines. We have bounced from this level numerous times throughout this bull run, which has made the support stronger and more significant each time.
Now that I have identified the levels I am monitoring, let’s take a look at why I think the market is behaving this way.
First and foremost, I believe the media needs talking points to explain daily market movements, so they try to make sense of the regular gyrations of the market. I think this confuses the average investor and leaves them trying to “chase their tails” guessing where the market is going within the trading range.
Currently, there are strong fundamentals in the underlying economy such as GDP and job growth which provide support at the bottom of the range. On the other hand, there is a desire by the Fed to raise rates and by the Trump administration to level the playing field on trade, which has created resistance at the top of the range. In our opinion, most of the movements in the middle can be attributed to the regular movements of money within the markets. Further, every time we start pressing the all-time highs, the likelihood of Fed getting aggressive with rates increases. Conversely, every time we get to the low end, we say “is it really that bad” with 4% GDP and strong job growth and we start to rebound.
The technical levels mentioned above help define this debate that most investors are trying to understand. These levels have served as support and resistance for so long that everyone should be watching them now. And, the more investors watch these levels, the more significant they become… and around and around we go.
Each time the S&P starts to run higher, pay close attention to the 2786 level because it has served as a near term high each of the last 3 times it closed there. This means investors will probably place bets on the same thing happening again. Since there is a strong likelihood there will be increased selling at this level, any move above would represent incredible strength and conviction to the upside.
Watch for the same thing for when the S&P heads lower. Keep a close eye on the 200-day moving average because investors will likely place buy orders at that level, hoping for yet another bounce. This also means any drop below the 200 day MA would represent serious market weakness, and the S&P 500 could fall sharply until it finds new support.
Hopefully this has given you some insight into the technical analysis I am looking at right now.
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Clint Kirby – Chief Financial Strategist
DreamWork Financial Group
Clint Kirby, DreamWork Financial Group, is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.