S&P 500 and NASDAQ COMPOSITE INDEX Technical Outlook: Is the Down Trend Over?

NASDAQ, S&P 500 – TECHNICAL OUTLOOK:

• The Nasdaq Composite Index is flirting with crucial support.
• Sustained upward momentum appears to be lacking in the S&P 500.
• What lies ahead and what are the key levels to watch?

Deeply oversold conditions, extreme pessimism, light positioning, and a positive start to the US earnings season give the impression that US benchmark indices are trying to establish a floor. Technical charts suggest that, while base-building is entirely possible, the turnaround is not yet confirmed.

Let us start with the big picture using the Nasdaq Composite Index. Since the charts are similar for it and the S&P 500, we will not look at the same timeframe for both indices.

NASDAQ COMPOSITE INDEX TECHNICAL OUTLOOK – NEUTRAL

The Nasdaq Composite Index is now at a fairly strong support area: the pre-Covid high of 9838, not too far from the June low of 10565, roughly coinciding with the 200-week moving average. The 14-month Relative Strength Index (RSI) is around the 40-mark – previous rebounds in the index (not apparent in the 1980s and 1990s due to chart scaling) were associated with RSI turnarounds from 40 (except for the Dotcom and the Great Financial Crisis episodes). The current setup is in that RSI zone now.

Also, the upward-sloping 200-month moving average (MMA) indicates that the super-long trend is up. Even in the two instances when the RSI dipped below 40, the upward-sloping 200-MMA provided a strong cushion in the respective downtrends.

NASDAQ COMPOSITE Monthly Chart

Chart Created Using TradingView

If we include stretched pessimism, supportive seasonality, and light positioning to the equation then the case for an imminent turnaround is not implausible. However, zooming in on shorter timeframe charts, the confirmation of a turnaround is lacking.

S&P 500 TECHNICAL OUTLOOK – NEUTRAL

The back-to-back Shooting Star candles on the weekly charts of the S&P 500 index (if today’s close is flat to lower as the week is not over just yet) imply a lack of conviction above 3750 (see chart). This is important because after a long decline (both in terms of extent and duration), there needs to be wide-ranging bullish candles with weekly closings around the highs of the week to signify that buyers have regained control. Granted, price action is still unfolding and could well turn out to be favourable for bulls, but evidence supporting such a scenario is absent so far.

S&P 500 Weekly Chart

Chart Created Using TradingView

Zooming on to the hourly charts, the story is not too different. The S&P 500 index has failed to break a crucial resistance area: the 200-hour moving average, the upper edge of a minor declining channel from end September, and the median line of a rising pitchfork channel also from end September. Moreover, RSI on the hourly chart has failed to rise above the 60 mark, implying feeble momentum (see chart).

S&P 500 Hourly Chart

Chart Created Using TradingView

The index is now testing immediate support at Wednesday’s low of 3667. A decisive break below would confirm that the short-term upward pressure had eased. The focus would then shift to a horizontal trendline from end September (now at about 3580) and the pre-Covid high of 3394. The index needs to hold above 3394-3580 for the turnaround case to remain alive. In this regard, any break above the early-October high of 3807 would raise the odds of a relief rally.

— Written by Manish Jaradi, Strategist for DailyFX.com