A five-week streak of advances that recently took the S&P 500 index from 4,100 points to a high of 4,450 points, is set to end on Friday.
That is, unless, we see remarkable bullish backlashes in the final trading hours of the week.
The index, the top 500 American corporations tracked by the SPDR S&P 500 ETF Trust SPY, fell by 1.3% in the last five sessions. This marked the worst weekly performance since the March banking crisis, which saw the collapses of Silicon Valley Bank and Signature Bank.
Expectations of reduced inflation and a more lenient Fed had boosted U.S. stocks following bank failures.
Then, the AI-led advance propelled the S&P 500 to a stronger rally, ushering in a new bull-market phase.
However, given how depressed stocks were back in March, the S&P 500’s surge over the last month has been a little too quick, raising red signals from a technical standpoint.
The S&P 500’s 14-day relative strength index (RSI), a well-known momentum indicator that detects oversold and overbought levels, went deeper into overbought territory last week, provoking the return of the bears who have detected too much excitement from the bulls.
Chart: S&P 500 Entered Overbought RSI Conditions In June Triggering A Bears’ Comeback
S&P 500: Key Levels To Watch Next
If the bears seize control of the short-term trend, as appears to be the case based on recent price action, the S&P 500 might fall towards the 50-day moving average support around the 4,200 area.
This corresponds to a 5.5% drop from June highs, and it would be an important test to see how resilient buyers are on the downside.
The range between 4.190 and 4.210 was also an important resistance region this year, and its breakout triggered the rally extension in June.
More severe bearish scenarios would likely emerge if the support at 4,200 gives way to the bears’ wrath.
In that event, the S&P 500 could test 4,127 first — which represents the 50% retracement from the 2023 low-to-high range — and then the psychological 4,000 level, which would imply a 10% drop from June highs.
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