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It’s been a great start to Q3 as the S&P 500 (SPY) broke strongly to new all-time highs. This was expected due to the positive momentum from Q2 and a higher timeframe bullish bias, and my article from two weeks ago suggested to “hold your nose and buy.”
This week’s article looks at expectations for H2 and why it may not be such a good idea to buy now as we are above 5550. Various techniques will be applied to multiple timeframes in a top-down process which also considers the major market drivers. The aim is to provide an actionable guide with directional bias, important levels, and expectations for future price action.
S&P 500 Monthly and Quarterly
The S&P500 has closed out its third stellar quarter in a row. Furthermore, 2024 has had the second best start to election year in history, with only 1976 having a larger return through the first half of the year.
A positive start to an election year has been an extremely positive omen for SPX. Out of the 16 previous years where it has had a positive return in the first half of the year, prices have been higher 100% of the time in the second half, including 5 years that had double-digit returns for H2. The table below is from our research at Matrixtrade –
Of course, a lot can happen in the space of 6 months. The table below shows we can still expect an average drawdown of -7.25% in these typically bullish periods.
Technical analysis can help identify when this drawdown will unfold and find opportunities to buy the dip.
A look at the monthly chart shows new highs for July, which is expected given the bullish June bar and positive Q2. The first half of July is also the best performing two-week period of the year. Amazingly, the Nasdaq has been higher in July 16 times in a row.
But just like H2, or Q3, a lot can happen in a month. A 5% rally can lead to a top, reversal and then close the month +0.5%; it would still be marked down as a positive month.
Now that new highs have been made, the July bar should really stay above the 5446 monthly low to stay bullish. Later in the month, the June high of 5523 could be important, but it is too close to current trading to be relevant now.
Fibonacci extensions and measured moves provide targets. The next major level comes from the 1.618* expansion of the 2021-2022 bear market and is way up at 5638.
Support comes in at the July low of 5446 and the 5265 area.
July is bar 8 (of a possible 9) in an upside Demark exhaustion count. These counts can have an effect from bar 8 onwards, so a reaction could be seen this month.
S&P 500 Weekly
A very strong bar formed this week, negating the bearish implications of the previous weekly “doji” bar. The close at the highs and above the channel suggest the move will follow through early next week.
The weekly Demark exhaustion signal has now completed, and this is a red flag, especially combined with the monthly exhaustion now in play. Looking back at previous 3 signals, we can see a reaction either on bar 9, or 2 weeks following the completion of bar 9. That is a pretty big window, and certainly no reason to short, but the warning is clear: the last two corrections of >5% happened soon after weekly exhaustion signals.
Resistance at the weekly channel highs has been broken, but as mentioned in previous articles, this was minor and the rally “could simply hug the channel as it moves higher.”
This week’s low of 5446 is initial support. 5265 is a major level, but should not be tested if this rally is to stay strong.
S&P 500 Daily
3 bullish daily bars propelled the SPX to 5570 and Friday’s close at 5567 was right at the highs, suggesting follow through at some point. The French election at the weekend may cause European stocks to dip and pull down S&P500 futures into a lower open, but as long as the gap down is not significant (e.g. over -1%), it should recover directly for new highs. Indeed, a favorable result in France may cause a large gap higher.
The volume profile at the right of the daily chart shows a balanced profile centered on the heavy volume level of 5470. Moving too far over 5570 would pull this out of balance and is likely unsustainable without building a new high volume area at higher prices. 5470 could act as a magnet on the next dip.
Resistance comes from the weekly and monthly references.
On the downside, 5440-46 is initial support, but the big level remains 5400. The 20dma is at 5452 and rising, so could be in play on the next dip.
An upside Demark will be on bar 8 on Monday. A reaction is expected on bars 8 or 9 so new highs could lead to exhaustion and a pause/dip.
Drivers/Events
The odds for a September cut have been rising and now sit at around 72%. Fed Chair Powell helped this process by stating we “are getting back on a disinflationary path” at the ECB’s Sintra forum on Tuesday. Weak data such as ISM Services PMI falling from 53.8 to 48.8 and an ADP payrolls miss aided the dovish expectations, but it was Friday’s Jobs Report which pushed the odds over 70%.
You’ve got to wonder how bullish this really is. A September cut has always been likely as long as inflation moderates, and we don’t really need to see the economic data unravelling as well. After all, history tells us cuts won’t be the magic solution for a slowing economy.
Next week has three major scheduled events. On Tuesday and Wednesday, Fed Chair Powell will make his Semi-Annual Monetary Policy Report before the Senate Banking Committee. Is there anything new to say? Perhaps there is in light of last week’s data, although it would be a major shock if he hints at a July cut in 25 days. The odds of this are very low at only 7.8%, so the Fed would have to be very concerned to surprise the markets this way. I therefore wonder if a July cut would be a “sell the news” event, as it would reflect a Fed panicked by the economy.
Thursday’s CPI reading is expected to come in at 0.1%, taking the YoY figure to 3.1%. This would be another step towards easing.
Friday’s release of PPI may only ignite short-term moves, but is still an important metric.
Probable Moves Next Week(s)
The stats and the charts are all bullish. H2 is very likely to close higher, as is July. However, this is quite a vague expectation and there is scope for all sorts of moves before the monthly and H2 closes.
While dips at certain levels may be a buying opportunity, I would no longer to suggest to “hold your nose and buy” near the current price of 5567 – it’s too distant from support and inflection points. Furthermore, exhaustion signals are mounting up in multiple timeframes and the rally is being driven by weak data encouraging dovish positioning. There is a short-term bias for further highs next week based on Friday’s strong close, but I actually expect new highs to reverse on Monday or Tuesday and snap back to at least the high volume area of 5470.
As always, inflection points can be used to assess whether the next dip is healthy or a change in trend. Unfortunately, these cannot be moved higher, so 5440-46 remains initial support and 5400 stays as a key inflection. Holding these levels should lead to yet another new high, but a weekly close below 5400 could open the door for a move to 5000 later in Q3. This would ultimately create a buying opportunity to seek a positive close for H2.