S&P technical analysis: Bears back in town or temporary respite?

S&P 500 technical analysis: Doji candle at 78.6% Fibonacci retracement level calls for caution
Nasdaq technical analysis: Inverted hammer off summer highs point to possible bearish reversal… or a trap
US Stocks have surged higher in recent weeks on hopes of peak interest rates

Technical analysis: Nasdaq, S&P and DAX - Video

In recent weeks, the US stock markets have been experiencing one of their most favourable periods this year. This positive trend can be attributed to the prevailing optimism that interest rates will soon fall, given the downward trajectory of inflation. However, it's worth noting that the markets, particularly the tech-heavy Nasdaq and S&P 500 both seem somewhat overbought following a rapid three-week surge. This raises the possibility of a short-term pullback. Despite this, it's essential to differentiate any potential short-term weakness from a bearish reversal, unless price action on the charts or a strong pushback from the Federal Reserve indicate otherwise.

S&P 500 technical analysis

Yesterday saw the likes of the S&P and Nasdaq extend their impressive three-week rally, with the latter rising to test the July high, marking its highest point since January 2022. These gains were spurred by fresh US data revealing further signs of easing inflationary pressures, notably a surprising decline in prices paid to US producers in October, the most significant drop since April 2020. However, upon the opening of the cash markets, the Nasdaq, S&P and Russell all retreated from their earlier highs and closed near or below their opening levels.

The resulting price action left behind a small doji candle. It is all about follow-through now. Does it go below Wednesday’s low and hold there, or do we continue pressing higher? The bears would want to see some downside follow-through to before stepping back in, while the bulls will probably prefer a bit of bullish consolidation rather than a sharp sell-off, in order to help work off overbought conditions through time than price action.

In the event the index breaks Wednesday’s low at 4495 decisively, then this could pave the way for a potential drop to 4415 area, the base of this week’s breakout.

Nasdaq 100 technical analysis

From a technical point of view, the sharp 3-week rally means the Nasdaq is now at ‘overbought’ levels, as indicated by the momentum indicator RSI, in the sub-chart, moving above the 70 threshold.

Interestingly, the RSI ‘overbought’ threshold has been reached with the underlying Nasdaq index testing its summer high of around 15933 yesterday when it couldn’t hold onto its earlier gains. The potential for the index to form a double top or a false break reversal pattern is therefore there. We just need to see some downside follow-through below Wednesday’s low now to trigger some momentum selling pressure. Even if we don’t see a major bearish reversal here, a small correction cannot be ruled out at this stage.

The underlying trend is bullish, so we would expect dips back to major support levels to hold. In the event of a breakdown, the key support level that will then become into focus would at 15533, the high from Monday.

For now, there are only modest signs of potential trouble for the bulls. But with everything mentioned, the bulls may wish to proceed with extra care from here, after enjoying a sharp three-week rally. The bears meanwhile will need to await further price action and a clear indication of a short-term top before pouncing again. A clean break below Wednesday’s low could be the trigger.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.