Written by: Alexander Voigt
The S&P 500 was very volatile last week and at one point even looked like it was going to break down rather significantly.
By the time we headed into the weekend, however, it had fully recovered as shown by the S&P 500 E-mini futures markets in the attached chart.
By forming the candlestick that it did, the key index showed that there is still plenty of interest in buying the dips, and that will probably be the strategy going forward as we head into this crucial week.
One of the major drivers going forward for the S&P 500 will be the continuation of constituent earnings. While we did have bank earnings on Friday, we get the majority of earnings reports over the next couple of weeks.
What this means is that volatility is likely to pick up, but it could be the catalyst that this market finally needs to break out to the upside. At this point, we are approaching a very stringent barrier, but there are signs it may be giving way to a move higher.
While the Federal Reserve still bears watching, this sustained rally has been driven by earnings, and we anticipate that first quarter numbers will be generally good, which should continue to fuel the market higher. Beyond that, the Fed signaling no further rate increases for the year should provide foundational support for this market.
Buying the Dips
I think we are going to see value hunters coming back into this market on any dips, based upon the macroeconomic situation in which we find central banks around the world adding liquidity. For the S&P, a key level would be around the 2877.25 level, the low of the previous week. Look for strong interest if we pull back to that level, as the technicals indicate further support underneath. If we do break down below the previous week, I’d advise stepping aside to see where the market proves itself before putting money to work.
Looking at the longer-term uptrend, it has been explosive and bullish for quite some time, but at this point it’s very likely that we are starting to get a bit exhausted.
[See also: Market Update April 1st 2019]
When you reach the extreme highs in a situation like this, volatility should pick up, and investors have been quick to sell on higher volatility. If we can break above the 2950 level, however, that longer-term uptrend will be confirmed yet again and should drive fresh money into the market as we will then start looking towards the big figure at 3000.
At this point, the uptrend would have to be thought of as being intact as long as we can stay above the 2800 level, which should be massive support that attracts a lot of institutional flow on pullbacks.
The “pain trade” has been to the upside and that is quite often how the market works, making it psychologically difficult to make money. Quite frankly, you can look at this chart and make an argument for it being far too overbought, but the fear of missing out can be a powerful motivator.
With earnings season upon us, we could get a bit of volatility but money that has missed the massive move to the upside will be looking to flow into this market.
Psychologically, selling this market is almost impossible to do, at least until we break down below the 2800 level. At that point you may see a rush for the exits.
To the upside, any move above 2950 could be rather explosive as well, simply because it would be a complete capitulation by the remaining bears out there.
Alexander Voigt, founder of daytradingz.com
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