Last week’s rally in the equity futures was noticeable and impressive! Even after a negative non-farm payroll print, the S&P 500 futures didn’t remain weak for long, instead continuing to press against the big round 2550 level yesterday.
While lately we have been singing the same bullish song when it comes to the S&P 500 futures, this time we see signs of a two-sided market as this month heads into the mid-month slowdown in the days to come.
On the thirty-minute candlestick chart below, the orange line at the 2554 area is the 50% extension of the September range. So far, only once this year, in February, has the prior month’s range been exceeded by the 50% extension or more.
In addition, the pattern over the course of the last couple of years is that when this market breaks out and extends its range, it usually leads to price consolidation, or what we call “back and fill” - meaning that this market will chop around at new all-time highs, especially the big round 50-handle increments such as 2550.
Therefore, we are looking for continued resistance above 2550 this week. Specifically, we are watching three levels to the upside - the aformentioned 2554, the weekly 23.6% extension at 2558, and the monthly 61.8% extension at 2562.
While we expect resistance, we will not necessarily be going short this market. Rather, either we may just avoid going long above 2550, or we may sell out-of-the-money options above these levels.
Since we do anticipate some weakness, we will continue with the trend of buying dips. The 10-handle pullback from the all-time high to the low yesterday offered a fair buying opportunity at 2540.75. While this could work again, we would still prefer to buy the 2540.75 area with smaller size.
The level we are watching closely is the 50% retracement area of last week’s range. We think this market needs to trade down to the 2534 price to attract buyers. This would be more than a 16-handle pullback ,which seems huge in the quiet market of late, and should present a fair risk-to-reward scenario for longs.