The S&P 500 Index’s best week in a year has brought the broad equities benchmark to a decisive point where stocks can make a significant break higher or find their gains capped.
On Friday, the S&P 500 reversed a downtrend from its September highs, hitting 4,350 on Friday after soaring nearly 6% over the previous five sessions. It also recaptured its 50-day moving average, after crossing its 200-DMA. Crossing a moving average is key because it can signal a shift in sentiment. Stocks held onto those gains Monday.
Investors often lean on technical indicators when they’re feeling cautious and want to know if price trends are being sustained. The S&P 500 has clawed back about half of last month’s 10% decline from its July high, but investors still face geopolitical risks, rising volatility and elevated inflation, underscoring expectations that the Federal Reserve is poised to keep interest rates high.
The S&P 500 currently sits at around 4,365, and chartists are monitoring the 4,355 level, which marks a 50% retracement from the peak-to-trough decline from its July highs to October lows. If it holds above that, the 4,400 level, where the index hovered during its mid-October highs, is the next number to watch, according to Keith Lerner, co-chief investment officer at Truist Advisory Services.
“To reverse this downtrend, the S&P 500 still needs to break above 4,400,” said Lerner, whose firm is overweight US stocks.
Breaching 4,400 is the difference between equities being stuck in sideways trading or rallying for the rest of the year, said Cameron Dawson, chief investment officer at Newedge Wealth.
“The S&P 500 faces resistance at 4,400 with the combination of the 100-day moving average and the top of the downtrend that has emerged since the market began trading weaker in August,” she said. “This is a place where we could see sellers come back to the market.”
Crucial Few Weeks
In another sign that this rally has legs, the Magnificent Seven tech stocks — Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Nvidia Corp., and Tesla Inc. — sold off at the end of last month, Lerner said.
“In the later stage of a correction, market leaders succumb to selling pressure,” he said.
That said, those stocks were down an average of about 9% from their 52-week highs at the end of last week on a dimming outlook for fourth-quarter earnings. However, the S&P 500’s gains are broadening beyond its biggest members, as more than 90% of the index’s stocks traded above their 10-DMAs on Friday.
“There was technical damage to markets over the past few weeks following the downturn off the July highs, but the S&P 500 has been able to rally back,” said Michael Sheldon, chief investment officer at RDM Financial Group. He sees a sustained push above 4,400 as a sign that stocks are gaining strength.
Besides technicals, seasonal indicators have turned bullish after flashing red last month. Going back to the 1950s, the five best consecutive trading sessions of the year are those that follow Oct. 27, averaging a return of 1.5%, according to Ryan Detrick, chief market strategist at Carson Group.
Source: Stock Traders Almanac
But while November is known as one of the best months for stocks, there are periods of weakness. Following a strong open, the market tends to drift sideways through the middle of the month and into the US Thanksgiving holiday before rallying to finish the month, according to Jeffrey Hirsch, editor of the Stock Trader’s Almanac.
So what happens over the coming weeks will be crucial in determining if bulls or bears are driving stocks into the end the year.
“Seasonals haven’t been shaken yet,” Hirsch added. “But if the stock market doesn’t rally during a bullish period by yearend, then there’s something more powerful at play that would favor equity bears.”
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