S&P has pulled back inside its 1885-1840 trading range after the fake break out during last Friday when the NFP were announced. We mentioned in previous posts that bulls had more to lose near 1885 than bears and that divergence in the RSI despite the new all time highs was an alarming signal for long positions. The pull back that started on Friday pushed the index in just 2 trading sessions back towards 1840. This is the most important short-term support and yesterday was held. This is a good sign for bulls and as I always say, the market’s support and resistance levels should be respected and not traded against them. So in this case we should look at the bullish perspective as the index has held support and could as easily make an upward move towards 1870 to continue this sideways trading.
However this one month sideways formation could be a long-term top forming. We should not ignore this as we should not also ignore the divergence signs and the upward sloping wedge we are currently in and how close to the upper boundaries the index is trading.
S&P as long as it holds above 1840, we can expect a re-test of the highs or at least a partial retracement towards 1860-70. Breaking 1840 and making a weekly close below 1840 will activate a bearish scenario that could push the index towards 1750 or even lower than 1700. But until then we have to patiently wait and take positions in favor of the support and resistance levels. Now that we are close to support, we turn bullish with a sell stop close by to protect us.
As always, thank you for taking the time to catch up on my thinking.