Stock Market Challenged at Key Technical Resistance

Chart of the S&P 500 (SPX) – Stock Market Challenged at Key Technical Resistance – Source: TheTechnicals.com and TradingView

Support and resistance are among the primary tools used by technical analysts. They’re used to provide approximate levels of stock market supply and demand for trading purposes. Support is considered a price “floor” where demand may begin to exceed supply. This tends to create upward price pressure. And resistance is considered a price “ceiling” where supply may begin to exceed demand. This tends to create downward price pressure. Of course, technical analysis is far from an exact science. And detractors often see support and resistance levels as little more than simple coincidence.

Major S&P 500 Resistance

But if we look at the S&P 500 (SPX), the most broadly used benchmark index, resistance around the 2816 level has been crystal clear. As shown on the chart above, the S&P 500 rose to around the 2816 level in October and November of last year before plunging both times. And in early December, the index rose to just short of that resistance – around 2800 – before initiating the disastrous market plunge of December.

Resistance Revisited

Fast forward to one week ago and then today, and the 2816 area has once again served as exceptionally solid resistance. On Monday, the S&P 500 rose slightly above 2816 before falling back sharply.

Was there some fundamental factor that caused price to respect this resistance and subsequently retreat? Some analysts may say that skepticism over the prospects of a U.S.-China trade deal contributed to the quick negative turnaround.

Perhaps more likely, though, this can be considered a technical sell-off. This is reasonable and expected given the very sharp trajectory of the market’s rise over the past two+ months. Technical analysis attempts to identify just where these types of reversals or pullbacks may be likely to occur.

What May Happen Next for the S&P 500?

If we stick with the support/resistance thesis, the 2816 price area remains a significant upside barrier to further gains. But if the index is able to clear that barrier with a strong breakout, that could open the path back up towards September’s 2940-area record highs.

Alternatively, a continued retreat that falls below the recently-cleared 200-day moving average could result in the type of volatile drops similar to what we saw in the fourth quarter of 2018.