S&P technical analysis: Bears back in town or temporary respite?

• S&P 500 technical analysis: Doji candle at 78.6% Fibonacci retracement level calls for caution
• Nasdaq technical analysis: Inverted hammer off summer highs point to possible bearish reversal… or a trap
• US Stocks have surged higher in recent weeks on hopes of peak interest rates

In recent weeks, the US stock markets have been experiencing one of their most favourable periods this year. This positive trend can be attributed to the prevailing optimism that interest rates will soon fall, given the downward trajectory of inflation. However, it's worth noting that the markets, particularly the tech-heavy Nasdaq and S&P 500 both seem somewhat overbought following a rapid three-week surge. This raises the possibility of a short-term pullback. Despite this, it's essential to differentiate any potential short-term weakness from a bearish reversal, unless price action on the charts or a strong pushback from the Federal Reserve indicate otherwise.

S&P 500 technical analysis

Yesterday saw the likes of the S&P and Nasdaq extend their impressive three-week rally, with the latter rising to test the July high, marking its highest point since January 2022. These gains were spurred by fresh US data revealing further signs of easing inflationary pressures, notably a surprising decline in prices paid to US producers in October, the most significant drop since April 2020. However, upon the opening of the cash markets, the Nasdaq, S&P and Russell all retreated from their earlier highs and closed near or below their opening levels.

The resulting price action left behind a small doji candle. It is all about follow-through now. Does it go below Wednesday’s low and hold there, or do we continue pressing higher? The bears would want to see some downside follow-through to before stepping back in, while the bulls will probably prefer a bit of bullish consolidation rather than a sharp sell-off, in order to help work off overbought conditions through time than price action.

In the event the index breaks Wednesday’s low at 4495 decisively, then this could pave the way for a potential drop to 4415 area, the base of this week’s breakout.

Nasdaq 100 technical analysis

From a technical point of view, the sharp 3-week rally means the Nasdaq is now at ‘overbought’ levels, as indicated by the momentum indicator RSI, in the sub-chart, moving above the 70 threshold.

Interestingly, the RSI ‘overbought’ threshold has been reached with the underlying Nasdaq index testing its summer high of around 15933 yesterday when it couldn’t hold onto its earlier gains. The potential for the index to form a double top or a false break reversal pattern is therefore there. We just need to see some downside follow-through below Wednesday’s low now to trigger some momentum selling pressure. Even if we don’t see a major bearish reversal here, a small correction cannot be ruled out at this stage.

The underlying trend is bullish, so we would expect dips back to major support levels to hold. In the event of a breakdown, the key support level that will then become into focus would at 15533, the high from Monday.

For now, there are only modest signs of potential trouble for the bulls. But with everything mentioned, the bulls may wish to proceed with extra care from here, after enjoying a sharp three-week rally. The bears meanwhile will need to await further price action and a clear indication of a short-term top before pouncing again. A clean break below Wednesday’s low could be the trigger.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R