The Bottom Line:
- Monthly charts show signs of exhaustion in the S&P 500 and NASDAQ 100, with the Russell 2000 exhibiting relative strength.
- Daily chart analysis of the S&P 500 reveals a consolidation range that has been broken to the upside, potentially signaling a continuation of the bullish trend.
- Moving average analysis suggests a potential bullish signal if the 8-day EMA crosses back above the 21-day EMA.
- Cautious bullishness is warranted, with the author gradually increasing exposure to long positions.
- Potential downside risk remains, with a break below the consolidation low as a key bearish trigger.
Monthly Chart Analysis: Signs of Exhaustion and Relative Strength
Topping Tails and Exhaustion Signals on Monthly Charts
On the monthly chart of the S&P 500, a topping tail is visible in the July candle, indicating potential exhaustion on the upside. While this signal can take time to play out, it’s worth noting that a more significant reversal would require a move below the month’s low of 5,400. Similarly, the NASDAQ 100 monthly chart shows a slightly more bearish candle, with a red body and a topping tail, aligning with the rotational trade out of technology and into other sectors observed throughout July.
Relative Strength in the Russell 2000
In contrast to the S&P 500 and NASDAQ 100, the Russell 2000 monthly chart exhibits a stronger bar, suggesting that small caps are benefiting from the anticipated interest rate easing cycle. Lower interest rates tend to help smaller corporations, which are often more indebted and not yet profitable. The strength in the Russell 2000 during July reinforces the idea that the selling in the market was relatively weak and not broad-based, with money flowing from technology into other S&P sectors and small-cap stocks.
Rotational Aspect and Lack of Strong Selling
The rotational aspect of the market is crucial to understanding the current dynamics. The selling observed in July was not indicative of a genuinely bearish market, as money was simply shifting from technology to other sectors and the Russell 2000. In a truly bearish market, there would be no place to hide, and the Russell 2000 would not be experiencing such gains. This suggests that, for now, there is no strong selling pressure in the market, and if the market holds up, small-cap names and the iShares Russell 2000 ETF (IWM) may outperform.
Daily Chart Consolidation: Potential Bullish Breakout
Topping Tails and Exhaustion Signals on Monthly Charts
On the monthly chart of the S&P 500, a topping tail is visible in the July candle, indicating potential exhaustion on the upside. While this signal can take time to play out, it’s worth noting that a more significant reversal would require a move below the month’s low of 5,400. Similarly, the NASDAQ 100 monthly chart shows a slightly more bearish candle, with a red body and a topping tail, aligning with the rotational trade out of technology and into other sectors observed throughout July.
Relative Strength in the Russell 2000
In contrast to the S&P 500 and NASDAQ 100, the Russell 2000 monthly chart exhibits a stronger bar, suggesting that small caps are benefiting from the anticipated interest rate easing cycle. Lower interest rates tend to help smaller corporations, which are often more indebted and not yet profitable. The strength in the Russell 2000 during July reinforces the idea that the selling in the market was relatively weak and not broad-based, with money flowing from technology into other S&P sectors and small-cap stocks.
Money Shifting Between Sectors, Not Leaving the Market
The rotational aspect of the market is crucial to understanding the current dynamics. The selling observed in July was not indicative of a genuinely bearish market, as money was simply shifting from technology to other sectors and the Russell 2000. In a truly bearish market, there would be no place to hide, and the Russell 2000 would not be experiencing such gains. This suggests that, for now, there is no strong selling pressure in the market, and if the market holds up, small-cap names and the iShares Russell 2000 ETF (IWM) may outperform.
Moving Average Analysis: Bullish Signal on the Horizon
Consolidation Range Breakout and Potential Short Squeeze
The daily chart of the S&P 500 reveals a significant technical development following the formation of a consolidation range. Initially, this range may have been perceived as bearish by many market participants, potentially leading to an increase in short positions. However, the gap up and strong close above the consolidation area, fueled by favorable news from China and the Fed’s reaffirmation of a potential September rate cut, has likely caught many shorts off guard. This “shock and awe” effect could make it difficult for the market to retrace back into the consolidation area, as shorts may be forced to cover their positions on any minor pullbacks.
Moving Average Crossover: A Bullish Signal on the Horizon
The 8-day exponential moving average (EMA) and 21-day EMA, which are closely watched by traders, recently experienced a benign crossover to the downside. Notably, this crossover lacked significant follow-through, with the 8-day EMA moving sideways rather than steeply downward. As price action has now reclaimed both moving averages, traders should keep an eye on the potential for the 8-day EMA to cross back above the 21-day EMA. Such a bullish crossover, especially in light of the brief and shallow nature of the prior bearish cross, could serve as a strong buy signal for the market.
Cautiously Bullish Outlook and Position Management
Given the current technical landscape, a cautiously bullish outlook appears appropriate. Initiating long positions slowly and incrementally after the Fed announcement aligns with this perspective. However, it is crucial to maintain a balanced approach and consider potential risks. A decisive break below the consolidation low would negate the bullish thesis and suggest market weakness. As the market progresses, monitoring the interaction between price action and key moving averages will provide valuable insights into the sustainability of the bullish momentum.
Cautious Bullishness: Gradual Long Position Exposure
Gradual Long Position Exposure
Given the current technical landscape, a cautiously bullish outlook appears appropriate. Initiating long positions slowly and incrementally after the Fed announcement aligns with this perspective. This approach allows for participation in potential upside while managing risk in case of unexpected market shifts. By gradually increasing exposure to long positions, traders can adapt to changing market conditions and avoid overcommitting to a particular bias.
Balancing Bullish Outlook with Risk Management
While the technical analysis suggests a bullish bias, it is crucial to maintain a balanced approach and consider potential risks. A decisive break below the consolidation low would negate the bullish thesis and suggest market weakness. Therefore, it is essential to identify key support levels and set appropriate stop-loss orders to protect capital in case of adverse market movements. By combining a bullish outlook with prudent risk management techniques, traders can navigate the market with greater confidence and flexibility.
Monitoring Key Technical Indicators
As the market progresses, monitoring the interaction between price action and key moving averages will provide valuable insights into the sustainability of the bullish momentum. Traders should keep a close eye on the 8-day exponential moving average (EMA) and the 21-day EMA, as a bullish crossover of the 8-day EMA above the 21-day EMA could serve as a strong buy signal. Additionally, observing the market’s reaction to key support and resistance levels, as well as the overall volume and breadth of market participation, will help gauge the strength and validity of the bullish narrative.
Downside Risk: Key Bearish Trigger to Monitor
Potential Bearish Catalyst: Breakdown of Key Support
While the current technical landscape favors a cautiously bullish outlook, it is essential to remain vigilant for potential bearish catalysts that could derail the positive momentum. One such scenario would be a decisive breakdown below key support levels, particularly the low of the recent consolidation range. If the S&P 500 were to close below this critical level, it would suggest a shift in market sentiment and could trigger a more pronounced selloff. Traders should closely monitor price action around these key support zones and be prepared to adjust their positions accordingly.
Sector Rotation and Broader Market Health
In addition to the technical factors discussed, it is crucial to consider the broader market context and the ongoing sector rotation. While the current market strength appears to be driven by a shift in capital from technology to other sectors and small-cap stocks, it is important to assess the sustainability of this trend. If the rotation were to stall or reverse, it could indicate a more widespread risk-off sentiment and potentially lead to a broader market pullback. Monitoring the relative performance of various sectors and the overall breadth of the market can provide valuable insights into the health of the rally.
Global Economic Developments and Geopolitical Risks
Beyond the technical realm, traders must also be attuned to global economic developments and geopolitical risks that could impact market sentiment. Unexpected shifts in monetary policy, escalating trade tensions, or geopolitical events could all serve as potential bearish triggers. By staying informed about these macro factors and their potential implications for the market, traders can better navigate the ever-changing financial landscape and adjust their strategies as needed. Incorporating a holistic approach that combines technical analysis with an understanding of fundamental drivers can help traders identify and manage potential downside risks while capitalizing on opportunities in the market.
