S&P 500, SPX, NASDAQ 100, NDX – OUTLOOK:
- The S&P 500 and the Nasdaq 100 index continue to make new year-to-date highs.
- While there is no sign of a reversal, optimism is running high amid overcrowded positioning.
- What is the outlook for the two indices and what are the key levels to watch?
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US equity indices continue to make fresh year-to-date highs in a reflection of the uptrend. However, extreme optimism, overbought conditions, and overcrowded positioning pose a minor setback risk, especially if earnings disappoint.
The CNN Fear and Greed index hit 84 on Tuesday before retreating slightly, but still near levels that have triggered at least some sort of a pullback in the past, including December 2022, February 2023, and June 2023. Meanwhile, market diversity as measured by fractal dimensions appears to be low, as highlighted in “Dow, S&P 500, Nasdaq Technical Outlook: No Sign of a Reversal,” published July 9.
Nasdaq 100 Daily Chart
Chart Created by Manish Jaradi Using TradingView
Fractal dimensions measure the distribution of diversity. When the measure hits the lower bound, typically 1.25-1.30 depending on the market, it indicates extremely low diversity as market participants bet in the same direction, raising the odds of at least a pause/reversal. For the Nasdaq 100 index, the 65-day fractal dimension fell below the threshold of 1.25, flashing a red flag.
The July-September has historically proved to be the weakest period in a calendar year. If earnings fail to meet/exceed expectations, this year may not be different given the sharp rally in recent months. Consensus estimates suggest the current reporting season to be a trough for earnings, which is not matched by consensus US economic growth expectations (real GDP growth is expected to deteriorate into the year-end).
Nasdaq 100 Daily Chart
Chart Created by Manish Jaradi Using TradingView; Refer to notes at the bottom.
Nasdaq 100: Overbought, but no sign of a reversal
On technical charts, the Nasdaq 100 index’s trend remains up, as the daily colour-coded candlestick show. The upward momentum on the daily and weekly charts remains strong, but
on the monthly charts looks anemic compared with the 50% rally since October (see the monthly chart).
Nasdaq 100 Monthly Chart
Chart Created by Manish Jaradi Using TradingView
Granted the price action is still unfolding and momentum on the higher timeframe charts could improve further, but it is a noteworthy factor to watch. A failure of momentum to rise on higher timeframe charts would be a sign that the rally since last year was corrective (as part of the broader correction that started in 2022), and not the resumption of the long-term bull market.
Immediate support is at the mid-June high of 15285, around the 30-day moving average. Stronger support is on the 89-day moving average (now at about 14000).
S&P 500 Daily Chart
Chart Created by Manish Jaradi Using TradingView; Refer to notes at the bottom.
S&P 500: Uptrend intact, but hurdle ahead
From a trend perspective, like the Nasdaq 100 index, the S&P 500 index’s trend remains up as the daily colour-coded candlestick charts show. Having said that, the S&P 500 index appears to be succumbing once again to stiff resistance on the median line of a pitchfork channel from the end of 2022.
S&P 500 Daily Chart
Chart Created by Manish Jaradi Using TradingView
However, there is no sign of reversal while the index continues to make new year-to-date highs. And unless there is a price confirmation, the path of least resistance remains sideways to up. Immediate support is at the mid-June high of 4450, roughly around the 30-day moving average which has served as solid support since the rally began in March.
So any break below would confirm that the upward pressure had faded temporarily. A fall below the lower edge of the channel, roughly around the lower edge of the Ichimoku cloud on the daily chart poses a risk to the nine-month uptrend. While the support remains intact, the S&P 500 could test the April 2022 high of 4637, potentially the 2022 record high of 4819.
Note: The above colour-coded chart(s) is(are) based on trending/momentum indicators to minimize subjective biases in trend identification. It is an attempt to segregate bullish Vs bearish phases, and consolidation within a trend Vs reversal of a trend. Blue candles represent a Bullish phase. Red candles represent a Bearish phase. Grey candles serve as Consolidation phases (within a Bullish or a Bearish phase), but sometimes they tend to form at the end of a trend. Candle colors are not predictive – they merely state what the current trend is. Indeed, the candle color can change in the next bar. False patterns can occur around the 200-period moving average, around a support/resistance, and/or in a sideways/choppy market. The author does not guarantee the accuracy of the information. Past performance is not indicative of future performance. Users of the information do so at their own risk.
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— Written by Manish Jaradi, Strategist for DailyFX.com
— Contact and follow Jaradi on Twitter: @JaradiManish