US stocks are still in rebound mode after the S&P 500 fell last week to its lowest level since December 2020, but many chart watchers remain unconvinced that the rally will be more than just another bear market rally.
What would it take to change their mind? Emphasis is placed on the 3800 level on the indicator, which so far has proven to be very resistant.
“Since the beginning of last week, 3,800 has become a new cap for the S&P 500 as sellers have repeatedly stepped in and beat weak interim bids,” Tom Essaye, founder of Sevens Report Research, said in a Thursday note.
S&P 500 SPX Index,
It rose 0.1% to 3,763 in choppy trading Thursday afternoon, and is on track for a weekly gain of 2.4%. Dow Jones Industrial Average DJIA,
It was down about 90 points, or 0.3%, on track for a weekly lead of 1.7%.
Essaye notes that the price action around 3800 is in line with the big capital index’s bear market slide this year.
In early February, the S&P 500 repeatedly tested the 4600 level before dropping 10% from peak to trough to its lowest level in late February, he recalls. Then after the March bounce, 4500 acted as a cap, with the market failing in early April, setting the stage for another 10% drop, Essaye said. In late April, 4,300 points became new resistance, with the market failing to overcome it several times before plummeting more than 11% in the latter half of May. In early June, 4150 became resistance, and failure to overcome it led to a 13% drop from peak to trough.
“Now, whether the market is poised to drop another 10% from this new resistance level (which will go down towards the 3400 area) remains to be seen, and a leg pressure rally remains a very good possibility,” Essaye said. “But the bottom line is, markets usually repeat themselves, and so far this year, the S&P 500 has failed its ’round numbers’ most likely due to the influence of derivatives traders, at least four times.”
This leaves 3,800 critical near-term turning points to watch, as a break above that could lead to “potentially violent” pressure higher, “while another failure could mean new, uncertain lows,” he said.
Technical analyst Andrew Adams, in a note on Wednesday in favor of the Saut strategy, described the market as taking “small steps to try to find a bottom here,” but noted that a close above the 3800 level would provide some relief.
Referring to the chart below, Adams said there is a technical justification for the S&P 500 rebound as it occurred on Friday, providing at least some initial indication that a potential bottom has been reached. He wrote that follow-up to the upside is essential in the coming days, with the first hurdle at 3800 and a test of the “gap” on the chart between 3,838 and 3900.
The technician noticed an “open space” between about 3800 and 4100 on the chart thanks to a rapid market decline over the past few weeks, arguing that if the S&P 500 can sustain a movement above 3800, the “price vacuum” will likely pull the index higher. . However, the “high risk” environment is still below 3800.
“I would feel a little better in terms of risking on the long side if the S&P could break above 3800 and stay above it,” Adams wrote. “If that happens, I think the more aggressive participants can start adding some risk in the hope of a potential drop. Until then, we have to make this market prove itself.”