The SPDR S&P 500 ETF Trust SPY has rallied more than 30% off its March lows. But at 2,930, the S&P 500 is still well short of its all-time high of 3,393 back in February.
The next several weeks will be critical for the market in determining whether the recent market strength is a sign the COVID-19 bottom is in or whether it is nothing more than a bear market rally and news lows are ahead.
Troubling Sign
Bank of America analyst Savita Subramanian recently said the firm’s quant work suggests the S&P 500 is experiencing a bear market rally. Subramanian said lower-quality “dollar stocks” or “distressed equities” were the best performing factor during the early stages of previous bull markets. In 2020 and in previous bear market rallies, however, these stocks have lagged.
“The mediocre performance of Low Price stocks, i.e. distressed equities from the bottom, suggests we may want to watch this factor for signs of confirmation that this is a real bull rather than a bear rally,” he said.
From a technical perspective, there are two key levels traders should be watching in the near-term to determine whether or not the S&P 500 is heading for new all-time highs or new 2020 lows.
Levels To Watch
The first key level is the 3,000 level. In addition to that level being a key psychological level for traders, it's also roughly in-line with the S&P 500’s 200-day simple moving average. Despite the recent rally, the S&P 500 hasn’t traded above that major moving average since the first week of March.
Dan Russo, chief market strategist of Chaikin Analytics, said a break above 3,000 would shift the technical focus to the early March highs.
The second key level is the 3,110 level.
“If the S&P 500 breaks above its 200-day moving average of about 3,003, that opens the door to the 3,110 level,” Russo said Tuesday.
Russo said a technical breakdown at either of these levels won’t necessarily mean new 2020 lows are coming.
“On the downside, a break of last week’s low near 2,800 would set the stage for a move to the 2,575 - 2,650 range,” he said.
Investor sentiment on StockTwits is split right down the middle when it comes to where the S&P 500 is headed next. StockTwits messages mentioning the SPY ETF were 50.2% bullish on Tuesday.
Benzinga’s Take
Unfortunately, even a breakout above 3,110 won’t be a clear sign that another long-term bull market is firmly in place. February’s all-time high of 3,393 will also eventually serve as a major technical resistance level, and a failure to break out to new highs could form a bearish double top pattern.
Do you agree with this take? Email feedback@benzinga.com with your thoughts.
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