Another Major S&P Level to Keep on Your Radar

The index took out the $20T market cap level with ease, but $25T is a different story

by Bernie Schaeffer

Published on Apr 24, 2018 at 8:55 AM

It's been a lengthy sideways chop for the S&P 500 Index (SPX) since the Jan. 26 all-time closing high of 2,872.87 -- with emphasis resting on the "chop" more so than the "sideways," given the high-volatility gaps and swings that have characterized the last few months of broad-market equity action. The downside has so far been generally contained by support at the SPX's 200-day moving average and the 2,550 "half century" area, with successful tests occurring in both early February and again on the very first trading day of April.

But the longer the S&P ricochets in its recent trading range, the better chance there is that overhead resistance levels will emerge and strengthen. One of the most immediately pressing at current levels is the 80-day moving average, which unceremoniously capped the S&P intraday high last Wednesday, April 18. This trendline had previously caught the index's 2017 lows, which makes last week's rejection at this level worthy of careful monitoring by the bulls.

Also in the neighborhood of the 80-day (which stood at 2,715.79 at Friday's close) are 2,667.16 (quadruple the March 2009 bear-market low) and 2,673.61 (the year-end 2017 close). Notably, the S&P ended last week squarely between these two levels, at 2,670.14.

And just about 3% north of that 80-day moving average is the round 2,800 level. It's entirely common for such "big round numbers" (i.e., newly explored century and millennium levels) to trip up stocks on their way higher, just as they can "stem the bleeding" on sell-offs. So it wasn't too terrifically shocking when the S&P -- after having sliced cleanly below 2,800 in the course of its steep Feb. 2 slide -- went on to encounter resistance at 2,800 in mid-March. The index rose as high as 2,801.90 in intraday action on March 13, but retreated quickly to end the day down 0.6% at 2,765.31 -- and in the process, the S&P closed beneath not only the 2,800 century mark, but another "big round number" just below.

We're referring here to 2,779, which Schaeffer's Quantitative Analyst Chris Prybal notes is equivalent to a $25 trillion market cap for the S&P. Round market-cap milestones have the ability, in our experience, to exert the same manner of psychological support and resistance as round-number levels on the charts.

While this may seem a somewhat nebulous metric in relation to an instrument tracking hundreds of companies, note that the S&P closed squarely at 2,779.60 on Feb. 26, immediately prior to a whipsaw reversal in the next session that ultimately yielded a 1.3% loss for the index. And on March 12, one session prior to the aforementioned unsuccessful intraday incursion on 2,800 (and the ensuing close beneath both 2,800 and 2,779.60), the S&P's intraday low checked in squarely at 2,779.26. So it's fair to say that in recent months, when S&P has tested its footing around 2,779, the terrain at this level has proven to be considerably slippery.

That wasn't the case when the S&P took on the $20 trillion market cap level of 2,223, which was vanquished over the course of one single trading day back on Dec. 7, 2016 -- when the market was in the early innings of the massive low-volatility rally that defined the post-election year of 2017. In that regard, the "power" of the $25 trillion market cap to act as resistance is in no small part contingent on the headline-driven day-to-day uncertainty among investors, with its significance reinforced by the presence of existing nearby "levels of concern," from a chart perspective (in addition to the round 2,800 region, the 2,746 area marks a 50% retracement of the decline from the Jan. 26 intraday high to the Feb. 9 intraday low).

Given the likelihood of potentially stiff resistance in this looming chart region -- coupled with the more immediate technical concerns listed earlier, and with no reason to anticipate an immediate resolution to the macro-level anxiety that has kept upside in check through much of 2018 -- investors may do well to brace for an extended continuation of this choppy range-bound volatility, and adjust their trading approaches accordingly.

spx 25T mkt cap daily chart


Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, April 22.

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