by Lance Roberts, RIA
The S&P 500 index is a critical benchmark for the U.S. equity market, and its performance often dictates investor sentiment and decision-making. Between November 1, 2022, and September 6, 2024, the S&P 500 experienced a significant rally but not without volatility. Currently, investors have very mixed views about where markets are heading next as concerns of a recession linger or what changes to monetary policy will cause.
However, as investors, we must trade the market we have today. Therefore, using technical analysis, we can explore bullish and bearish market dynamics to assist us in managing risk more effectively. This blog will outline three bullish and bearish perspectives using momentum, relative strength, and other key technical indicators. Finally, we will conclude with five actionable steps investors can take today to mitigate risk.
(Note: All data is as of the Friday, September 6 close.)
Bullish Outlook
1. Strong Support at Key Moving Averages
One of the primary bullish signals for the S&P 500 is its tendency to find support at critical moving averages. Throughout the analyzed period, the 50, 100, and 200-day moving averages supported the index significantly, particularly in late 2023 and early 2024. Even though the index faced downward pressure in August, its ability to bounce from the 150-day moving average indicates that buyers continue to find levels to increase equity exposure. Given the market has remained steadily above the 200-DMA and that average is trending higher, it signals that the longer-term bullish trend remains intact.
2. Momentum Indicators Point to Potential Reversal
Momentum indicators such as the Moving Average Convergence Divergence (MACD) have recently triggered a short-term “sell signal,” which coincides with the recent price correction. However, while these signals have coincided with lower prices in the near term, they have consistently bottomed between -25 and -50. Such has provided investors with repeated opportunities to increase equity exposure over the last two years. When the MACD begins to register readings below -50, such has historically indicated when markets are turning from upward trending to lower trending prices.
3. Relative Strength Index (RSI) Near Oversold Levels
The Relative Strength Index (RSI) measures the magnitude of recent price changes. As of Friday’s close, the RSI is approaching more oversold levels near 30. While not there yet, which suggests markets could see additional weakness in the near term, low readings historically signal short-term market bottoms. Readings of 30 or below indicate that the selling pressure is likely overextended, and buyers tend to regain market control. In April and August 2024, the RSI hovered around these oversold levels, providing a strong signal for bullish traders to take advantage of a bounce. While the recent correction likely has further to go, the current low RSI readings suggest a bounce is likely. Investors should use any rally to rebalance portfolio risk.
However, investors should also consider the bearish warnings.
Bearish Outlook
1. A Lower High
From a bearish perspective, the recent lower high of the market is concerning. If the market declines and sets a lower low, that is one of the more telling technical signals indicating a new potential bearish trend. Lower highs suggest buyers are losing conviction, and each new rally is weaker than the previous one. Simultaneously, lower lows suggest that selling pressure is increasing. This pattern, if sustained, could indicate a deeper corrective phase, possibly targeting lower support zones between 4600 and 5200. While the recent lower high is very early, a recent pattern to review is 2022.
If the market rallies in the weeks ahead, setting a new high, that price action will negate the warning from lower highs.
2. Decreasing Volume of Rallies
Another bearish indicator is the declining trading volume during recent rallies. According to technical analysis principles, strong price moves should be accompanied by increasing volume, signaling widespread market participation. However, rallies in the S&P 500 over the last two months coincided with lower volume levels. As discussed previously, these negative divergences warned investors that the upward move lacks conviction. The divergence between price and volume forewarned of this recent correction.
3. Longer-Term MACD Signals Turn Bearish
We regularly publish our longer-term technical analysis and statistics in the weekly Bull Bear Report (Subscribe for FREE). One of those charts is the Weekly Risk Management Analysis. The chart below matches an intermediate and longer-term weekly MACD signal to the markets. When both signals are on “buy signals,” such has coincided with a trending bull market advance. When both signals confirm a “sell,” as in early 2022, the market has gone through correctional phases.
Currently, while early, both the intermediate and longer-term MACD “sell” signals are registered. There are several crucial points to note:
- The market is trading at the top of its long-term trend channel from the 2009 lows. While it previously traded above that channel in 2021 due to artificial stimulus, the current advance may be near its current cycle peak.
- These are weekly signals and, therefore, very slow to move. Signals can whip back and forth for a month or so before becoming confirmed by a breakdown in the market.
- As noted, the market’s price action needs to confirm the “buy” and “sell” signals. If the market enters a deeper corrective phase, a break of the 200-DMA will confirm the end of the bullish advance that started in 2022.
Notably, while bullish and bearish signals exist, the market can remain in flux for quite some time. For example, the market is approaching oversold territory based on RSI, which typically suggests a reversal. However, the bearish price action and weak volume indicate that caution is warranted. Therefore, while some technical indicators provide conflicting signals, investors must manage near-term risk while waiting for markets to confirm their next direction.
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