The S&P 500 took a breather and edged lower on Monday after the bullish fairy dust sprinkled onto the markets by two prominent central bankers last week began to settle.

Last Friday, Federal Reserve Chair Jerome Powell and Bank of Japan Governor Ueda made comments that sent bullish vibes to markets, leading to a rally in stocks.

Ueda’s Dovish Tone

Ueda confirmed that the BOJ will continue with policy normalization if inflation trends towards a stable 2%.

He told the Japanese Parliament that while interest rates would trend higher over time, he would consider markets’ reactions to rate hikes in setting policy.

This removes the possibility of a repeat of a disorderly unwind of the yen carry trade from earlier this month, which caused caused Japanese (and global) stocks to drop like rock, reducing market risk.

Powell’s Promises

Powell was more dovish than expected.

He 1) promised rate cuts in September, and 2) hinted at a 50-basis point cut or perhaps even more aggressive cuts later on, all while reassuring us that the Fed would not “welcome” any further increases in unemployment.

Near-Term Outlook

Ueda and Powell basically took away two of the main reasons stocks dropped hard in August: worries about the yen carry trade and fears that the Fed wouldn’t cut rates quickly enough.

With those out of the way, the near-term outlook for stocks looks a lot rosier making it easier for the S&P 500 to keep climbing.

Remaining Risks

Despite the improved near-term outlook, there remains risks that could cause the rally to fizzle out: The two main risks are:

1. Growth slowdown: If growth slows more than expected, stocks will drop, and Fed rate cuts won’t be able to stop it. Growing fears of a recession remains the biggest threat to bulls in the U.S. stock market.
2. Disappointment from Fed rate cuts: The market has already priced in aggressive rate cuts. If the Fed cuts rates more gradually than expected, it will cause short-term disappointment.

The economic calendar is relatively light this week, and the week before the Labor Day holiday is usually a snooze fest in the markets, as everyone scrambles to squeeze in one last beach day.

However, there are a few key economic data releases on growth and inflation to watch that could still influence market direction.

If you’re a Premium subscriber, make sure to read our “Week Ahead in FX” report to see which specific events to focus on.

If the upcoming data confirm that inflation is falling and growth is stable, don’t be surprised if the S&P 500 hits a new high. Otherwise, be prepared for a pop in downside volatility.

Nvidia (NVDA) also reports earnings on Wednesday. Given its substantial weighting in the index, its performance can impact the S&P 500’s overall direction. If their earnings disappoint, watch out!

Keeping these potential event risks in mind, let’s see what the technicals are saying about the S&P 500

Welcome to TA of the Day (TAOTD)! 👋

Let’s focus on the current technical setup of the S&P 500 based on the 4-hour chart:

📈 Technical Analysis of SPX 4-Hour Chart

Did you know? There are several ways to trade the S&P 500. In the U.S., you can trade futures contracts or ETFs that track the S&P 500, such as Vanguard’s VFIAX or SPDR’s SPY. Outside the U.S., you can trade S&P 500 CFDs, which allow for leveraged exposure without owning the underlying assets.

Let’s analyze the S&P 500 using key technical analysis concepts covered in our forex course.

Simple Moving Averages (SMAs):

• 10-period SMA: Positioned around 5,606. The price is currently slightly above this level, indicating ongoing short-term bullish momentum. The upward slope confirms recent buying activity in the short term.
• 50-period SMA: Positioned around 5,456. The price is comfortably above this level, reinforcing the medium-term bullish trend. The slope is upward, indicating sustained strength.
• 100-period SMA: Positioned around 5,491. The price remains above this level, confirming medium-term bullish momentum. The upward slope supports the continuation of the uptrend.
• 200-period SMA: Positioned around 5,346. The price is well above this level, indicating strong long-term bullish momentum. The upward slope confirms the long-term trend remains intact.

Relative Positioning of Moving Averages:

• The 10-period SMA is currently above the 50-period, 100-period, and 200-period SMAs, signaling a robust short-term bullish trend within a broader bullish context.
• The 50-period SMA is also above the 100-period and 200-period SMAs, affirming continued bullish pressure across all timeframes.

Relative Strength Index (RSI):

• The RSI is currently at 63, indicating that the market is in bullish territory but not overbought.
• This suggests that there is still room for further upward movement before encountering significant resistance.

🕵️ Key Observations

Price Action:

Let’s analyze the recent price action of the SPX (S&P 500) based on the chart:

1. Strong Uptrend: The most notable feature is the strong uptrend, particularly evident since mid-August.
2. Sharp Rally: There’s been a sharp, almost vertical rally from mid-August lows around 5,120 to current levels above 5,600.
3. Acceleration of Trend: The uptrend has noticeably accelerated after August 5, showing increased bullish momentum compared to the previous months.
4. Bullish Candles: The recent price action is characterized by a series of bullish (green) candles, indicating strong buying pressure.
5. Recent Consolidation: In the most recent candles, there’s a sign of short-term consolidation or a minor pullback from the recent high of 5,651.

Support and Resistance Levels:

• Support: Immediate support is at the 10-period SMA (5,606) and 50-period SMA (5,456).
• Resistance: Psychological resistance is near the 5,650 level.

🤔 Potential Trade Scenarios

Is S&P 500 a buy or sell?

Long Bias:

The following trade scenarios are provided solely for educational purposes. Since they don’t include full risk management practices, they are not intended to serve as actual trade recommendations, but merely food for thought to help you generate your own trade idea.

• Consideration Point: Consider entering a long position if the price finds support near the 10-period SMA at 5,606 or on a pullback to the 50-period SMA around 5,456. A breakout above the 5,650 level could also provide a buying opportunity.
• Invalidation Point: Consider setting a stop-loss below the 50-period SMA at around 5,450 to manage risk.
• Potential Target: Look for a move towards 5,670 or new all-time highs if the uptrend continues.

Rationale: The strong bullish momentum and position above all major SMAs suggest further upside potential. However, caution is warranted near the resistance at 5,650.

Short Bias:

• Consideration Point: Consider entering a short position if the price shows signs of rejection around the 5,620 resistance level or if there is a bearish divergence in the RSI.
• Invalidation Point: Consider setting a stop-loss above the recent high at around 5,651 to manage risk.
• Potential Target: Initial target could be the 10-period SMA at 5,606, with further downside potential towards the 50-period SMA at 5,456.

Rationale: The potential for resistance at 5,650 suggests a possible short-term pullback or consolidation. A rejection at this level could signal a short-term reversal.

📝 TAOTD Summary

• Current Position: The price has been in a clear uptrend, characterized by higher highs and higher lows. The recent price action shows a steady rally from the 5,200 level to above 5,600.
• Bullish Sentiment: This recent price action suggests a very strong bullish sentiment in the S&P 500.
• Resistance Testing: The price is currently near psychological resistance at the 5,650 level, which could act as a significant barrier in the short term.
• Short-Term Support: The 10-period SMA at 5,606 is providing immediate support, with the 50-period SMA at 5,456 offering additional support below.
• Healthy Momentum: The RSI indicates ongoing bullish momentum, with room for further upside before reaching overbought conditions.

This market structure suggests that the S&P 500 is in a robust bullish phase.

The alignment of all technical factors (price action, moving averages, momentum indicators) supports this bullish view.

The rapid recovery from August 5 with relatively small retracements, confirms this strong buying pressure.

However, the slight hesitation at current levels might suggest a short-term pause or potential for a minor correction.

Key levels to watch are the psychological 5,650 resistance above, and the 5,600 support zone below. A break above 5,650 could lead to further gains, while a fall below the 10 SMA might signal a short-term pullback.

Overall, the recent price action paints a picture of a strong, momentum-driven rally in the S&P 500, with no clear signs of exhaustion yet evident in the chart, but showing some signs of potential short-term consolidation.

The overall structure remains bullish as long as the series of higher lows is maintained and the price stays above key moving averages.