Mid-week market update: The S&P 500 daily stochastic recycled from overbought to neutral last week and stock prices pulled back. Initial support can be found at about 4320, with secondary support at about 4200, which is also the approximate level of the 50 dma.
Can 4320 hold?
Signs of weakness
I am seeing signs of short-term weakness. The usually reliable S&P 500 Intermediate Breadth Momentum Oscillator flashed a sell signal when its 14-day RSI recycled from overbought to neutral.
Technology leadership appears to be stalling. The relative performance of the sector has started to flatten out and relative breadth indicators are weakening, which are not good signs.
Market breadth isn’t broadening out in a significant way. The ratio of equal-weighted to float-weighted indices for the S&P 500 and NASDAQ 100 remain in downtrends. While the S&P 500 ratio may be trying to bottom, the NASDAQ 100 is showing few signs that it’s turning up.
The lack of breadth in the recent rally is disturbing. Goldman strategist David Kostin pointed out that narrow rallies are usually followed by sharper drawdowns than normal, especially now when the market internals of technology, which is the leading sector, is weakening.
Taken together, these point to further weakness in the coming days. However, the recent resilience of stock prices should also be respected. I am inclined to give a two-thirds chance that a floor can be found for the S&P 500 at 4320, which is not that far away.
In other words, it’s too late for traders to sell, but too soon to buy in light of the risks.