The S&P500, (SPX) the index of large-cap US equities, ended a short and unusual week at 2213.35 on Friday, up 31.45 for a week that only had three-and-a-half days of trading, and up roughly 90 points for the month … so far.
The half-day of trading Friday (the US markets were closed Thursday for the Thanksgiving holiday) demonstrated a lot of ‘panic’ buying: traders fearful of missing the train gapped the market up at the open, and hit every offer until the closing bell. The index closed at the high of the day, and set a new all-time high for the SPX.
And that’s the problem as we try to figure out what is likely to happen this week. On Friday the most experienced and powerful traders were away from the market for a four-day weekend, and the volume was extremely light.
So was the all-time high an artefact created by inexperienced traders playing in a thin market? Or was it the real deal, a break-out from a long-term resistance area that presages a continuation of this aging Bull to higher highs?
The break-out Friday could be interpreted as the Bulls’ last gasp before the market slumps back into the consolidation area where it has stayed most of this year.
And certainly there is lots to worry about, both in the US economy and in Europe, where next weekend the Italians vote on a constitutional amendment that looks likely to fail, If it does, the government will be prohibited from bailing out Italian banks, and as many as eight may fail as a result.
But we think the break-out is genuine, at least for the rest of this year. There will be some profit-taking after the new high, and the rally in the past 15 days has established a very steep trendline. It will be hard to maintain the same pace. Many of the internal indicators are approaching overbought territory.
A short-term retracement is possible. But we think it will be brief. This is the best time of the year for equities, and we think the SPX is likely to be higher at the end of the year.
This week
We will see the end and beginning of the month this week, normally a bullish period for stocks. The index will try to hold up for a new higher close. The decisive breakout last Friday – even though the volume was thin – strongly suggests that we are in a rising trend with higher highs ahead in the long term.
This week 2175 will be the first major support line for the index. Holding above it could bring new buyers in to push the index up to the 2235-50 zone for new highs.
A move below 2175 would run buyer’s stops and bring the index back into the former consolidation range from 2175 to 2135.
Today
For the S&P500 mini futures (ES)
The ES also spiked to a higher closing level Friday on thin volume, and moved slightly lower in overnight trading Sunday. The spiking move could be treated as an ultra-short-term exhaustion move and we might see the ES retreat into last week’s range today.
2203-2200 will be today’s key zone. Holding above it would give odds the impression that the ES still intends to test last Friday’s high area 2211.75-13.50. A move below this key zone could lead ES to move down to retest last week’s low area 2178-75.50.
The short-term slow STO indicator has an extremely overbought condition and any strong early rally could meet sellers taking profits. The daily PMO indicator still accelerates, which suggests that any pullback could continue to attract new buyers. Moves in both directions will encounter opposition.
Major support levels: 2195-93, 2183-81, 2172-74, 2165-62.50
Major resistance levels: 2220.50-26, 2235.50-37.50, 2245-48, 2252.00-56
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