Bulls Defend 2600-2630 On S&P 500 Last Week – Market Reaction To FOMC Meeting This Week Likely Tell

Bulls last week defended support at 2600-2630 on the S&P 500, which has rallied massively since bottoming on December 26. Daily conditions are deeply overbought, pricing in a dovish Fed. A two-day FOMC meeting begins Tuesday. A ‘buy the rumor, sell the news’ is possible.

 

Equity bulls probably rejoice how trading evolved in a holiday-shortened last week.

The S&P 500 large cap index, for instance, was down big Tuesday, but there were bids waiting near the 50-day moving average, which also approximates major support zone at 2600-2630. Mid-December, bulls were unable to save this support, followed by acceleration in selling. The significance of this level is because for most of last year the index went back and forth between 2800 and 2600 (Chart 1). In the middle of this month, 2600 was recaptured, followed by 2630, so last week’s action can be construed as breakout retest. The question is, can bulls build on it?

From the Boxing Day low through the intraday high on January 18, the S&P 500 (2664.76) rallied 14 percent. This followed a 20.2-percent decline between October 3 and that low. Particularly on the daily chart, things are way extended. The index is also right at a falling trend line from early October.  A breakout here has the potential to self-fulfill – at least near term. Immediately ahead, the daily upper Bollinger band lies at 2704.53.

 

If longs prevail and the aforementioned trend line falls this week, shorts can provide a tailwind. It is possible a mini-squeeze already took place last week.

In the January 15 period, short interest on SPY (SPDR S&P 500 ETF) fell 8.1 percent period-over-period to 192.1 million shares. The prior period was the highest since mid-March 2017 (Chart 2).  Shorts, who began to add as October rolled around, got aggressive in the second half last month as the S&P 500 lost 2600 and selling accelerated.  But in the first half this month, the index rallied 4.1 percent. Short-covering likely helped. Since the 15th, the S&P 500 is up another 2.1 percent, raising the possibility that more shorts likely left.  If the aforementioned trend line is retaken, even more are likely to do so.

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Disclaimer: This article is not intended to be, nor shall it be construed as, investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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