As technical traders and researchers, we've been paying very close attention to the GREEN ARC Fibonacci resistance level on the SPY as a key level for the US stock market and any hope of a continued upside price rally. The SPY has traded near this level for the past three weeks and appears to be attempting a bit of an upside breakout right now. Yet, we understand a long holiday weekend is upon us in the US, Memorial Day, and after a big upside GAP on Monday, the US stock market has stalled over the past few days.
SPDR S&P500 ETF WEEKLY CHART
Our researchers believe this GREEN ARC is still acting as critical price resistance and believe the SPY may sell off into the end of the week resulting in a failed attempt to breach this key resistance level. If this happens, the failed attempt to break this resistance could prompt a change in price trend and initiate a new downside price trend. If this resistance level is broken by the end of this week, then we have a pretty solid indicator that continued bullish price trending may continue.
Absent of any real news that may drive the market trend this holiday weekend and with most of the US still in shutdown mode, we believe the US stock market has continued to trade within this no man's land area for many weeks now. From the end of April till now, we've seen moderate upside price action in certain sectors, yet other sectors continue to show signs of weakness.
TRANSPORTATION INDEX WEEKLY CHART
This Transportation Index Weekly chart is a perfect example of the weakness that is evident away from the S&P500, NASDAQ, and Dow Industrials. Compare the last 6+ weeks of trading on this TRAN chart to the SPY chart above. Notice that the TRAN chart shows a very congested sideways price channel (highlighted in YELLOW) as well as a much deeper upside price move from the lows near March 20. While the US major indexes have rallied substantially, the broader market indexes are not experiencing the upside price advance and continue to suggest overall weakness.
This disconnect in the markets suggests speculation is driving the US major indexes higher and not real fundamental appreciation based on earnings and revenues. When this speculation ends, typically when speculators realize the price has been driven a bit too high compared to reality, then the trend can change in an instant.
ISHARES RUSSELL 2000 ETF WEEKLY CHART
This IWM Russell 2000 ETF Weekly chart highlights a similarly week upside price rally since the March 20th bottom. The WHITE LINE on this chart represents a support/resistance level from early trading low price levels in 2017. Our research team believes these levels represent a very important support/resistance level for the Russell 2000 ETF as this level coincides with the GAP in price that was generated within the recent selloff on March 9, 2020. That GAP cleared this key support/resistance level with a very big downside price move. We believe this level will act as intense resistance as price attempts to fill the GAP.
Overall, the US stock market has continued to trade within this no man's land recently. There have been some pretty decent upside price moves in certain sectors over the past few weeks. Precious metals, certain travel/leisure stocks, and, of course, technology and services stocks. Yet, we continue to warn our friends and followers to be very aware that the US stock market is far from immune to more downside price activity. A deep selloff like we experienced will very often react with a “recovery move” - a dead cat bounce type of move. While the NQ has been a big mover, these other sectors suggest we may be nearing a tipping point and we urge technical traders to stay very aware of the risks as we head into this long holiday weekend.
Chief Market Strategist