Trump tariffs are stalling stock market momentum
“Turning to the charts, the first piece of good news for the bulls is since the bearish ‘outside day’ candle on Dec. 18 that signaled short-term trouble ahead -- as such candles did throughout 2024 -- the SPX is now above the high of that bearish candle day. Moreover, the index did not experience a bearish ‘outside day’ candle at all last week.”
-Monday Morning Outlook, January 27, 2025
On the morning this commentary was posted last week, the S&P 500 Index (SPX—6,040.53) gapped lower on news that China had created an artificial intelligence tool – DeepSeek – that was on par with U.S-based OpenAI and ran on a more cost-effective chip.
Monday morning’s gap created a bearish “island reversal” pattern, a multi-day pattern in which a gap higher is followed by consolidation and a gap lower. It was the second time since November that this pattern emerged. In both cases, the gap lower marked a short-term low as the SPX rallied sharply in the following days.
In both cases, the gaps were filled within five days on an intraday basis. However, the SPX’s Jan. 24 close at 6,101 that preceded last Monday’s gap lower has not been filled on a closing basis, as the round 6,100 level and the close prior to last week’s gap lower colluded to act as resistance in Friday’s trading. Therefore, the potential reversal pattern that surfaced last Monday has yet to be invalidated, which presents a short-term risk for bulls. A close above 6,101 would invalidate the bearish signal and tilt the odds more in the bulls’ favor from this perspective.
Additionally, the SPX was rejected in the vicinity of past highs in mid-December and from two weeks ago. Looking back to mid-December, the price action can be best described as a range between 5,830 and 6,100, with the SPX entering this week’s trading nearer the top of this range, which favors the bears in the short term if this range-bound trading is to continue into the foreseeable future.
The market rallied last week after big-cap technology companies like Tesla (TSLA), Apple (AAPL), Microsoft (MSFT), IBM (IBM), Intel (INTC) and Meta Platforms (META) reporting earnings. There was also the Federal Open Market Committee (FOMC) meeting, where the Fed held pat as expected, all while investors reacted rather positively to a plethora of economic reports -- including data on housing, jobless claims, advanced fourth-quarter GDP and Core PCE prices. However, the collective reaction to this data was not enough to push the index through prior highs. That said, it was confirmed that Trump’s tariffs on Canada, Mexico and China would begin on Feb. 1, news that put a damper on the market Friday.
Additionally, after Friday’s close, there were headlines saying that the respective tariff rates could increase and there is nothing the countries can do now to forestall tariffs taking effect.

With the SPX trading closer the top of its range, there are multiple potential support levels above the range lows. The first potential level of support is at the 6,000-6,013 area, the latter marking highs in mid-November, early January and the low on Wednesday. The second level of potential support is at 5,965, or the breakout level from a trendline connecting lower highs in mid-January.
A break below these potential support levels heightens the odds of another trip to 5,835 or the Election Day close at 5,782, which marked last month’s low.
Resistance overhead is between 6,100 and 6,140, with the latter level being 20% above the August 2024 low.
On the sentiment front, the most bullish sentiment data point that we have, and used as a contrarian indicator, is total short interest on SPX component stocks, which increased slightly in the first half of January. A highly shorted market has been an ongoing theme since last year. With the SPX just below all-time highs and short interest on SPX components at a six-year high, the implication is the potential for short-covering that can either drive rallies or keep pullbacks to a minimum as shorts look for exit points.

A sentiment indicator that has shown improvement for bulls, but is not at a bearish nor bullish extreme, is the exposure of active investment managers, per the weekly National Association of Active Investment Managers (NAAIM) survey.
Right now, the reading is 68, down from the 100, or fully-invested reading, at the top in mid-December. One might view this as the market having more sideline money now relative to mid-December, even with the SPX around the mid-December levels.
But equity option buyers are still optimistic, and it may be that the market continues to chop around or move south again to shake out the optimism in this group before a sustained breakout above prior highs occurs.

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