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And below, read on about what Imre Gams thinks of the current market…
On June 29, I wrote about two obstacles the S&P 500 would have to clear in order to sustain a powerful rally.
At the time, I shared this price chart of the S&P 500 (SPX) index…
The first obstacle I mentioned were the blue trend lines that show the SPX trading within a descending channel. And the second hurdle the market needed to clear was the 50-day moving average (MA – red line).
Channels are powerful reversal patterns. Once prices break out of the pattern, you can expect a strong move in the opposite direction of the channel.
Now, let’s look at an updated SPX price chart to see how things have played out…
As you can see, the market has successfully broken out of both the descending channel and the 50-day MA.
Clearing these obstacles has opened the door for the strong rally we’ve seen through the month of July and the first two weeks of August.
In fact, the SPX has rallied over 12% in just the last 6 weeks.
And while that’s a very encouraging sign, my analysis suggests the current rally will likely end soon.
Let me show you what I mean on the price chart below…
The first important feature on this price chart is the blue trendline. It’s drawn by connecting the tops from January 3 and March 29.
Because it connects the two major swing points that have preceded significant selloffs, I expect the market to treat this trendline as an important resistance level.
Currently, this trendline comes in around 4370 in the index.
The second important feature is the Relative Strength Index (RSI – red line).
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The RSI measures momentum and usually registers overbought and oversold readings when the market is about to make a turn.
A reading above 80 is considered overbought, while a reading below 20 is considered oversold.
As you can see, the RSI has just reached overbought conditions.
When multiple pieces of technical analysis line up like this, it’s time to pay attention to what the market is trying to tell us.
If the market does start to pull back as it approaches this trendline, then there’s natural support that comes in between the 4175 to 4100 levels – which is where the index was trading back in early June.
If a pullback stabilizes around this area, I’ll be looking for an opportunity to buy the market so long as the appropriate chart pattern appears.
Happy trading,
Imre Gams
Analyst, Market Minute
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