weekly outlook for sp 500 12 sep to 16 sep potential final melt up upleg in progress above 2110100 s

S&P 500 – Potential final melt-up upleg in progress above 2110/100 support

(Click to enlarge charts)

Key Levels (1 to 3 weeks)

Intermediate support: 2136/30

Pivot (key support): 2110/100

Resistances: 2164, 2194 & 2220

Next support: 1991

Medium-term (1 to 3 weeks) Outlook

Last Friday, 02 September 2016 horrendous decline of 2.7% has reinforced our earlier anticipated fear of a post summer sell-off after a lull period (low volatility period) of almost two months since July 2016 (click here & here to recap our past weekly outlook reports). In addition, we have regretted “jumping the gun too early” to turn outright bullish on the U.S. SP 500 Index (proxy for the S&P 500 futures)  at the start of last week after a softer than expected Nonfarm payrolls data for August (151K versus a consensus of 180K).

Right now, the S&P 500 has declined right towards the 2110 key pull-back support where we expect a continuation of the potential “melt-up” phase (aka not genuine recovery) that I have emphasised in my last Q3 2016 Global Markets Outlook presentation. The most important aspect that I have stressed in my presentation that we should be looking at the sovereign/government bonds market as the next catalyst to trigger a potential major sell-off in risk assets such as equites.

Last week’s movement across the global financial markets had reaffirmed this potential catalyst as we witnessed the synchronised selling (spike in bond yields that lead to decline in bond prices) across government bonds (European, Japanese & U.S.) with equities.  

Therefore even though, the S&P 500 has reacted positively yesterday right at the 2110 key medium-term pull-back support but I will stress that we are now likely to be undergoing the potential final leg of the “melt-up” phase and it is only a matter of time before a full-fledged bear market materialises to correct the on-going seven year bull run that stared in March 2009. This first dent has occurred last Friday, 09 Sep 2016.  Key elements as follow:

• The 2110 pull-back support of the former trendline resistance that has capped previous advances since 17 May 2015 also confluences with the lower boundary of the medium-term ascending channel in place since 11 February 2016 low and close to 38.2% Fibonacci retracement of the recent up move from 27 June 2016 low to the current all-time high of 2194 seen on 15August 2016.
• In conjunction, the weekly (long-term) RSI oscillator has also stage a rebound at right at it supports and the 50% level. In addition, the daily (medium-term) RSI oscillator has dipped and reversed up from its extreme oversold level.  These observations suggest that upside momentum of price action has resurfaced.
• We have mentioned that movement of sovereign/government bonds prices are now highly direct correlated with equities, thus we should be monitoring the benchmark 10-year U.S. Treasury note as a cue for the S&P 500. As seen on the technical chart of the 10-year yield of the U.S. Treasury note, it is still capped by a key resistance of 1.98 which suggests that that the yield can see a further potential downleg to target 1.085/0.59 zone before a potential completion of its long-term primary downtrend in place since November 1994 with the recent emergence of an impending bullish “Descending Wedge” pattern. As the bond yield is inversely related to bond price, the bulls of the S&P 500 may still find some comfort at this juncture (refer to the 4^th chart).
• From a sector rotation perspective, the late bull cycle defensive group (our basket of consumer staples, utilities & REITS stocks) outperformance against a basket of high beta stocks in place since the start of 2016 has been wiped out. These observations suggest that the health of the seven year old matured bull market seen in the S&P 500 has started to erode which suggests that last Friday’s sell-off on 09 September 2016 can be considered as a first warning sign (refer to the 5^th chart).
• The 4 hour Stochastic oscillator of the Index has exited form its overbought region and still has room to manoeuvre to the downside before reaching an extreme oversold level. These observations suggest that the Index may see a minor pull-back first towards the 2136/30 intermediate support zone after yesterday’s sharp V-shaped up move below the intermediate resistance of 2164.

Therefore as long as the 2110/100 medium-term pivotal holds, the Index is likely to shape a further potential up move of the final “melt-up” upleg to retest the 2194 recent range top before targeting the next resistance at 2220 (Fibonacci cluster) in the first step.

However, failure to hold above the 2110/100 pivotal support is likely to invalidate the preferred bullish scenario to see a deeper decline towards the next support at 1991.

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