In last week’s note, I discussed the crossroads that the Standard & Poor’ 500 index (SPX) faced after rallying into a resistance band that coincided with prior week’s highs at 2954, the widely watched 62% retracement (2934) of the 1Q decline and the declining 200-dma at 3002. Early this week the S&P broke below a key short-term uptrend level defined by its 15-dma (2828) and has been below that level for a good part of the past three days.
This suggests that a short-term correction is underway, one that many bearish pundits conclude was the end of a bear market rally. While that bearish view is understandable and can’t be disregarded, I continue to urge investors to keep an open mind.
After a 34% rebound a pullback from heavy resistance, bearish concerns should not be a surprise, but considerable support bands that remain intact. As I noted last week, first trading support is at the prior week’s lows at 2797, which coincides the 50-% retracement of the Q1 sell-off at 2792. The S&P did temporarily break below that level on Thursday morning, but it had pulled itself back above that key support by the close and remains above that level at 2864.
I believe that it’s too early to conclude the pullback is over, but so far the equity market is respecting first support, which I view as encouraging. Should those levels break in the coming week there is a band of support at the S&P’s 50-dma at 2730 and the rising 200-week moving average at 2660. My view remains unchanged and expect pullbacks to be relatively shallow and new lows are unlikely.
While, market levels are going to remain one of the more important developments shaping investor sentiment in the coming weeks and months, it’s the cyclicals overall, and financials specifically, that are noteworthy right here. I’ve discussed their weakness previously but their absolute price charts are nearing important technical levels.
Unlike many technical analysts, I have not been of the view the S&P will retest its March lows. Many financials, however, are at or nearing that critical level and are also becoming increasingly oversold short-term. Sure, it’s far too early to conclude the XLF S&P 500 Financial Sector ETF featured above has bottomed, but a move above the 50-dma at 21.04 would be a wakeup call for short traders.
Additionally, a move above the May 8 highs at 22.32 is needed to confirm a short-term upside trend reversal while a move above the March and April highs near 23.65 would complete an intermediate-term bottom. For investors or traders interested in a contrary trade in this unloved sector, I would recommend using a stop loss at the recent lows near 20.
