S&P 500 Stuck Between Support and Resistance

Sentiment suggests stock market downside is limited at the moment

Senior Vice President of Research
Apr 10, 2023 at 9:30 AM
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…the strong rally from its 200-day moving average pushed the SPX back above the level that marked its trendline breakout in January at 3,970. Additionally, the SPX rallied sharply through the round 4,000-millennium mark, which was coincidentally the site of the trendline connecting lower highs since the equity benchmark’s peak in early February…the 4,161 level lingers just overhead, which is around 10% above the December 2022 closing low and…marked the February peak. And the 24-month moving average, which marked peaks in September 2022 and February 2023 is sitting at 4,250.

            -Monday Morning Outlook, April 3, 2023 

The second quarter’s first week of trading was not a win for bulls or bears, with the S&P 500 Index (SPX) closing at 4,105.02, just below its quarter-end close the week prior at 4,108.90. 

Short-term momentum continues to favor the bulls, with the SPX up about 6% from its mid-March low. However, the index remains stuck in the middle of potential support and resistance, whether looking at daily or longer-term monthly charts.

In past commentaries, I highlighted the historical importance of the SPX’s 24- and 36-month moving averages. Since June, the SPX has chopped between those trendlines. Its 24-month moving average is at 4,200, about 100 points above Friday's close, while the 36-month moving average is at 3,985, 115 points below it. From this perspective, there is equal risk-reward when taking these long-term moving averages into account.

The last time the SPX bounced around these trendlines for that long was from December 2009 to September 2010. The only difference then was the 24-month moving average acted as support, while the 36-month moving average was the end point for rallies. 

The longer range was resolved by an upside breakout above the 36-month moving average that resulted in a seven-month rally, at which point a six-month, 18% pullback began that ended with a retest of that trendline before a long, sustained rally beginning in October 2011. 

Bears do not want to see the 36-month moving average crossed again, as this has been a source of support and would potentially signal months of selling. Meanwhile, bulls are hoping for a cross above the 24-month moving average, as a potential sign that long-term risk is limited relative to the upside reward in the years to come.  

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…big money managers in equities have been on guard for the worst since before the financial fireworks erupted, cutting stock exposure while loading up on protection via cash and options hedging…Bank of America Corp.’s survey of money managers in February showed cash holdings stayed above 5%, while a net 31% of the respondents said they were underweight equities… By the team’s tally, equity positioning from hedge funds to individual investors and mutual funds pointed to a defensive posture, with a measure sitting in the 18th percentile of a historic range.

            -Bloomberg News, March 20, 2023 

“'The Fed indicated no intention to cut interest rates this year, yet risk assets are exhibiting an unprecedented rally, with European stocks trading near all-time highs and US stocks recovering recent losses,’ Kolanovic wrote Monday. ‘We expect a reversal in risk sentiment and the market retesting last year’s low over the coming months.'

            -Bloomberg News, April 3, 2023 

“'Bank of America Corp. clients sold US equities last week for the first time in five weeks, withdrawing the largest amount of funds from the asset class since October, according to strategists led by Jill Carey Hall.'

            -Bloomberg News, April 4, 2023 

Per the excerpts above, about how investors are positioned amid an uncertain economic environment, the sentiment angle suggests downside is limited. While the SPX’s technical backdrop has improved from a short-term perspective, the bigger picture is that it remains down nearly 10% year-over-year and below some long-term moving averages, such as the 24-month trendline discussed above.

The implication is that while support levels we have seen come into play in recent months are likely to remain in place, there isn’t exactly a 'fear of missing out' mentality among those sitting on the sidelines, which might support the case that technical levels overhead could continue to cap stocks.

That said, if you want to take a stance on direction, the sentiment angle favors bulls, unless the SPX moves back below potential support in the 3,970-4,000 range in the days or weeks ahead.

While there was little net movement in the SPX last week, buyers stepped in at the 4,075 level. This is interesting because the level marked major resistance twice in the first half of December as well as early March. As such, it remains a first line of defense going forward.

But even more important support is at the 3,970 level -- the site of January’s breakout above a trendline connecting major lower highs in 2022, and its close prior to a gap above trendline resistance connecting 2023’s lower highs.

The 3,950 region could also be important if a selloff emerges, as this is the site of the SPX’s 200-day moving average and, at this week’s end, the extended trendline connecting lower highs since the beginning of February.

Just 55 points above Friday’s close is 4,160, which marked the February high, implying the SPX has room for a little more upside. And roughly 120 points above, or 3%, is the 4,225 level, which is 10% above the 2022 close and another area of potential resistance.

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Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.

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