After the ECB announced its open ended QE program, markets around the world rallied. This morning, the S&P 500 finds itself roughly in the middle of its recent trading range, with futures turning lower.
S&P 500, daily bars
The risk-reward profile of a position taken at this juncture is pretty close to 50-50, with strong support around 2000, and major resistance above at 2115 (the upper end of the rising orange range). Tighter support and resistance come in around 2088 and 2045.
For the bulls, the better buy would be on a pullback back into the 1990’s, and for the bears, it would be better to wait to sell on a move back into the “death zone” above 2090.
The S&P 500 is forming a broad wedge as we move into mid-week trade with futures indicating a lower open. While the market has been showing considerable weakness so far for 2015, it would not take much to precipitate a breakout; a move above the upper edge of this wedge formation, around 2030, would open up a potential retest of the December highs.
S&P 500, 30 minute bars
A move back down towards 1992, however, could keep up the pressure on support to the point of a break. Often, multiple consecutive bounces off of a support level can have a “battering ram” effect, with a breakdown resulting after 3 or more retests. This process is exactly what happened back in early October prior to the big drop, and a repeat of those events in the next few weeks can’t be ruled out. We’ve already tested it twice, and gotten very little liftoff since.
The big event risk for the remainder of the week is the ECB rate decision, and the widely expected Euro-QE decision. How the market reacts to the announcement will have a major impact on how we position for a break from the wedge pattern on the chart above.
As we begin the shortened trading week this week, the S&P 500 finds itself roughly in the middle of its recent rising range. Price action so far in 2015 has been lackluster, but support around the 155 day moving average, currently around the 1992 level, has thus far held up under multiple retests.
S&P 500, daily bars
Such was also the case in October, when only on a third test did support finally break. So watch out this week for any reversals that take us down for another test of support at 1992; should we get that retest, we run a high likelihood of a breakdown this time.
Looking up, we have resistance firstly at the 50 day moving average around 2047 (call it 2050), and a major resistance zone, the “Death Zone” that has proven insurmountable in recent years, beginning around 2085 and extending up to 2115. A break above the 50 day would likely open up a move back into the Death Zone, though a move substantially beyond 2100 at this stage is probably beyond this market’s muster.
The S&P 500 has been doing it’s best yoyo impression over the past few weeks, with the Santa Yellen rally taking the index back into the vaunted “Death Zone” from which it promptly retreated. The volatility has formed some of the most bizarre market structures I’ve ever seen.
It’s very likely the market will now retest the 125 day moving average and possibly complete the corrective move that was underway prior to the most recent Fed meeting. Below are a set of charts from yesterday’s close.