sp 500 cautious on the recent rally 2692862017

Short-term Technical Outlook (Wed, 24 May 2017)

(Click to enlarge charts)

What happened earlier/yesterday

Despite all the negative typical “risk –off” events that sprouted out since Monday, 22 May 2017 such as the test firing of another ballistic missile from North Korea on Sunday, the tragic terrorist attack that occurred in Manchester, U.K and the today’s downgrade of China’s sovereign debt ratings from Moody’s to A1 from Aa3 due to rising financial risks from an increasing debt burden caused by previous credit-fueled stimulus (this is the first time in 30 years that China got a credit downgrade), the S&P 500 Index (proxy for the S&P 500 futures) had continued to inch higher and recovered the losses inflicted by U.S. President Trump’s political saga.

Yesterday’s close of the Index at 2398 had marked three consecutive higher closes since 18 May 2017 and surpassed our 2395 medium-term pivotal resistance set for this week. However, we are quite reluctant to turn outright bullish at this juncture due to the following technical elements.

Key technical elements

• From its minor swing low of 2379 seen on 22 May 2017, the Index has started to evolve within a bearish “Descending Wedge” configuration. In addition, the corresponding hourly RSI oscillator has started to trace out a bearish divergence since the start of this up move in price action from the 22 May 2017 minor swing low. These observations suggest that upside momentum of price action has started to wane (see 1 hour chart).
• Yesterday’s price action of the Index has led it to recapture the 20-day Moving Average and traded back above it.  However, after a closer examination from market breath studies, the percentage of the stocks in the S&P 500 that are above the 20-day Moving Average is still below a mean value of 58.08 (period of calculation is taken from the start of the on-going medium-term uptrend of the Index from 11 Feb 2016 to 23 May 2017). These observations suggest that the recent push up in the Index is attributed by only “a few stocks” rather than a broad-based participation (see daily & the 3^rd charts).

Key levels (1 to 3 days)

Pivot (key resistance): 2406

Supports: 2388 & 2370/67 (50%/61.8% Fib retracement of the up move from 18 May 2017 low)

Next resistance: 2422 (1.00 Fib projection of the up move from 18 May low to 20 May 2017 high)

Conclusion

Therefore, we maintain the bearish bias and tolerate the excess to 2409 but the Index needs to break below 2388 to open up scope for a potential corrective decline to target the 2370/67 support zone in the first step.

On the other hand, a clearance above 2409 is likely to invalidate the bearish bias and kick-start another upleg towards 2422 next in the short-term.

Charts are from City Index Advantage TraderPro & IndexIndicators.com

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