Mar ’20 Trend Line Breached Intra-Week Last Week But Saved By Close, Matter Of Time Before S&P 500 Joins Nasdaq 100

Last week, equity bulls stepped up in time to save a rising 14-month trend line on the S&P 500. A similar trend line has been breached on the Nasdaq 100, which acts weak. It is just a matter of time before a breach occurs on the S&P 500.

The S&P 500 last week came very close to breaking a rising trend line from the low of March last year. At Wednesday’s low of 4056.88, the large-cap index (4173.85) was down 4.2 percent for the week, and the trend line was decisively broken. From that low, it then rallied 2.9 percent on Thursday and Friday to finish the week down only 1.4 percent, ending right on that support (Chart 1).

Bids showed up just above the rising 50-day. Since reclaiming it in late April last year, the S&P 500 has tested the average eight times and is yet to breach it on a sustained basis. This, however, may not mean the coast is clear similar to the prior seven times.

Near term, there is room to rally. Medium-term, weekly candles are worthy of attention. A hanging man was formed last week. This was preceded by a hanging man, a gravestone doji, and a dragonfly doji in the prior three weeks. These are potentially bearish candles and need confirmation.

Wednesday’s 2.1 percent tumble in the S&P 500 was owed to a hotter-than-expected consumer price index report. In the 12 months to April, headline CPI jumped 4.2 percent and core CPI three percent. This was the fastest pace since September 2008 and January 1996, in that order (Chart 2).

For nearly four decades now, inflation has been rangebound, with a downward bias. Investors remember how inflation gradually built up in the late ’70s to hit mid-double digits in the early months of 1980.

Post-pandemic, headline CPI bottomed at 0.1 percent last May and core CPI at 1.2 percent last June. So, prices are clearly showing upward momentum.

Investors were already jittery by May 4 comments by Treasury Secretary Janet Yellen that the economy may be overheating and interest rates may have to rise, although speaking at a different event later that day she tried to walk back her comments, saying any price increases would be transitory.

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