The technical behavior of the market was particularly interesting the past week given most major indices stalled but never really delivered a lot of downside follow through, as some have been fearing. True, the S&P did correct 5% on Monday through Tuesday with the average S&P 500 index (SPX) stock down 8% and many cyclicals were off over 10%. Overall, however, the pullback has been relatively orderly.

I continue to view the 15-day moving average (S&P 2757) as a reasonable proxy for the short-term uptrend of the market, so it was noteworthy to see the SPX quickly hold above that moving average through the week and merely consolidate in a sideways range. In addition, the weaker Russell 2000 also held above its 15-dma this week in a similar narrow sideways range which I discuss below.

Where does that leave markets? The technical backdrop really hasn’t changed very much. Short-term momentum indicators were overbought two weeks ago suggesting a pause or pullback was likely pending, and this is now underway. Some of the overbought condition is working off, which technicians like to refer to as being “a correction in time not magnitude.”

The bottom line is that I see further consolidation likely over the coming 1-2 weeks but would note there are now two key support and resistance levels to pay attention to. Specifically, the next directional move will likely be confirmed by a break-out above the highs or breakdown below lows of the past two weeks. In other words, I expect a move beyond the trading range of the past two weeks will be the catalyst for investor sentiment to react. Those short-term thresholds are at 2875 on the upside and 2721 on the downside for the SPX.

In addition, pay close attention to the smaller-cap indices in the coming week such as the Russell 2000 featured below. Despite cyclicals selling off more than growth or safety stocks the past two weeks, the Russell 2000 has been surprisingly resilient. Of course, the surge in so many smaller Healthcare stocks has helped but the index has also traded in a narrow band.

Further Market Consolidation Likely Over Next Two Weeks

Similar to the S&P 500, I would expect an upside move above the red resistance band near 1250 to spur more buying while a breakdown below 1154 to fuel more selling. Here again, for long-side traders, I would use the 15-dma near 1190 as stop loss for long side positions.

Bottom Line: I see further consolidation likely over the coming 1-2 weeks.

Further Market Consolidation Likely Over Next Two Weeks
Further Market Consolidation Likely Over Next Two Weeks
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