S&P 500 expected to ride on bullish momentum for another breakout

THE S&P 500 is up over five per cent year to date and has broken out to fresh monthly highs as the earnings season gets underway. This came despite a slight pullback in the index in mid-January partially driven by weak data in the form of December retail sales which came in at -1.1% month-on-month compared to a -0.8 per cent consensus, the largest drop in a year. December’s manufacturing production saw the largest drop in nearly two years at -1.3% month-on-month, sharply lower than the -0.3 per cent expected. With the recent bullish tempo in the benchmark index, some would start to perceive it as a shift in position for the market as the index once again tested the long-term bullish or bearish barometer of the 200-day Simple Moving Average (SMA).

The S&P 500 was mostly trading in a range in the latter half of December and tightened into a consolidating symmetrical triangle, which gave way and led to a breakout on Jan 6 after the non-farm payroll report, where the data showed slowing wage growth of a 0.3% month-on-month increase in average hourly earnings compared to the 0.4 per cent consensus.

Further data that came in subsequently, such as the 3.5 per cent unemployment rate which was lower than the expected 3.7 per cent, came as a positive for hopes of a soft landing. The 6.5 per cent year-on-year Consumer Price Index met expectations, indicating that inflation is coming down on a path as the market expects.

Looking at the chart, there have been traces of bullish signals with higher lows being formed after the consolidation triangle breakout. Following the bullish breakout on Jan 6, the index rallied from 3,880 points to retest the resistance zone at 4,000-4,010 points, which was a key psychological level as well as a retest of the key downtrend resistance line.

The fresh breakout then slipped back under the downtrend resistance line. However, the support showed up at a key spot – right at the prior resistance in the 3,880-3,900 area, which held before the index rallied and attempted another break of the downtrend resistance line.

The short-term key resistance ahead is set to be a double-top formed at the 4,100 level. We saw the index tested at this level twice on Dec 1 and Dec 13 last year but failed to overcome it.

The 200-day SMA continues to act as a key resistance as well given the frequent, unsuccessful breaches of this popular measure over the past year. In addition, the closely-watched technical golden cross signal has yet to form. This is where the quicker 50-day SMA crosses over the slower 200-day SMA.

As we are still in the midst of the earnings season, the market is likely to continue to experience noise. We are therefore expecting to see more volatility going forward in terms of momentum in one direction or the other.

It is worth noting that the index has been making higher lows recently, but we have yet to make a significant higher high above the 4,100 level. Furthermore, should the index turn or change course out of the recent bullish momentum on a weak fundamental backdrop, a lack of traction could open up the trapdoor to the downside again in the event that the key short-term 3,800 support level is breached.

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For a more confirmatory turnaround signal, we should see the formation of the golden cross as well as the index sustaining above the 200-day SMA, alongside a successful breakout of the major downtrend line.

The writer is research analyst at Phillip Securities