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S 038 P 500 looks toppish below 2170 2180

Article By: ,  Financial Analyst
June 3, 2015 11:09 AM

As seen from the year-to-date performance (ending 21 May 2015) of the major and Asian stock indices, the S&P 500 has recorded a lacklustre performance of 3.53%. This dismal performance of S&P 500 is way below its counterparts such as the Euro STOXX 50 (+17.50%), Nikkei 225 (+16.05%) and Shanghai Composite (+35.19%) despite its improving economic conditions versus Europe, Japan and China.

Let’s dissect the S&P 500 from a technical analysis perspective to gauge its future expected performance.

Key elements

  • The S&P 500 is now trading close to the upper boundary (resistance) of its long term ascending channel (in light blue) in place since 02 October 2011 low at 2170/2180 (see weekly chart below).
  • The 2170/2180 resistance is a significant zone as it confluences with multiple Fibonacci projection clusters (see weekly & daily charts below).
  • The long term RSI oscillator continues to flash a bearish divergence signal since late December 2013 which indicates weakness in upside momentum in price action of the Index (see weekly chart below).
  • Another weakness can been seen in the recent price action since late December 2014 as the Index has traced out an impending bearish “Ascending Wedge” configuration (in dark blue) with its upper boundary (resistance) at 2140/2150 (see daily chart below).
  • The lower boundary (support) of the “Ascending Wedge” configuration stands at 2100 (see daily chart below).
  • The significant supports are at 2040 which is the 200-day Moving Average (in orange) follow by the lower boundary of the long-term ascending channel (in light blue) at 1980 (see daily chart below).
  • Market breadth has started to deteriorate since 24 April 2015 as the NYSE cumulative Advance/Decline line has traced out a lower “high” despite a higher “high” seen in the S&P 500 (see chart 2).
  • The Biotechnology sector which is considered as a sector leader due to its superb performance seen last year (+39%) has started to underperform against the S&P 500. Its relative strength chart by taking the respective ETFs (exchange traded funds) of the Biotechnology sector (IBB) against the S&P 500 (SPY) is being capped by a graphical resistance. In addition, the RSI oscillator is coming close to its overbought region. This weakness seen in a sector leader warrants caution on the broader market (see chart 3).



Chart 2:

Chart 3:

Key levels (1 to 3 months)

Intermediate resistance: 2140/2150

Pivot (key resistance): 2170/2180

Support: 2100, 2040 & 1980

Next resistance: 2335

Conclusion

The S&P 500 (US SP 500) is coming close to a key inflection level of 2140/2150 with deteriorating technical elements. As long as the 2170/2180 pivotal resistance is not surpassed, the Index faces the risk of a significant “min correction” of 5% to 6%. A break below 2100 is likely to add impetus for this potential steep decline towards 2040 before 1980. Do note that the long-term bullish trend is still intact (see monthly chart above).

On the other hand, a clearance above 2180 is likely to invalidate the bearish view to open up scope for a multi-month upside movement to target the next resistance at 2335.

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