S&P 500 Forecast for the Week Ahead: SPX Gaps into Oversold

S&P 500 Talking Points:

• The S&P 500 is working on its largest weekly loss since the pandemic of more than 7%. And while FOMC accommodation rolled in to save the day then, we may not be seeing a repeat of that occurrence here.
• RSI on the weekly chart of SPX just went oversold for the first time since that episode in March of 2020, illustrating the complication of chasing stock prices lower at this point. Given the late-week gaps there’s now a couple of key areas of resistance potential.

Stocks were sold aggressively last week following the Wednesday announcement of reciprocal tariffs from President Donald Trump. I think there were two shocking points that markets had to quickly price-in, with the first being that Trump would actually implement tariffs given a couple of different episodes in which he stepped back from doing so. There’s some related implications there, which I’ll touch on in a minute; but I think the second factor was the size of the tariffs and how they were calculated that caught many by surprise, with a whopping 54% levy on China which could have some wide ranging repercussions over the next couple of months if/when they’re integrated into the global economy.

While SPX closed on Wednesday right around that 5670 zone that marked the top of my ‘s2’ support zone for this year, the index was a veritable falling knife for the rest of the week as it gapped down on both Thursday and Friday and sold off aggressively through the session.

Perhaps most notably, there was no commentary coming in to try and save the day, a markets have become accustomed to since the Financial Collapse. In the GFC the Federal Reserve started to lean harder on communications with the market and messaging and this is why we have so much Fed-speak in the headlines, as various Fed members can use media engagements to help guide market expectations to a more desirable place, whatever that might mean at the time.

But in this episode, as we heard from Chair Powell on Friday, there’s no ‘Fed put’ nearby and the recent volatility hasn’t yet compelled the head of the world’s largest Central Bank to act. And from the Executive Branch, commentary from President Trump has seemed to be positive even despite the selling. The combination of this lack of worry from two of the most powerful areas of economics have seemingly frightened investors who’ve responded with just more and more selling.

The prior week closed as a bearish engulf, with rejection at the underside of the 200-day moving average. Last week was extension of that move and RSI has now went into oversold territory on the weekly chart for the first time since March of 2020, when the index was trading at less than half of its current value.

S&P 500 Weekly Price Chart

SPX and the Seasons of Change

There’s a lot of condemnation and finger pointing at this stage and given how divisive U.S. politics has become that shouldn’t be as much of a surprise, especially given the amount of change that’s taking place right now.

Given the lack of support from both Trump and U.S. Treasury Secretary Scott Bessent it seems that the focus is elsewhere, such as the bond market. And also given the $9 trillion in long-term bonds that need to be re-funded this year, there’s some rationale for why they might want to see longer-term yields continue to fall. But, as growth and inflation move higher, longer-term rates tend to go higher as well, which could complicate the debt situation for the U.S. Treasury later this year. And given Trump’s insistence on tariffs even with equities showing pain, it seems that there’s some logic behind that.

If the administration can successfully lower long term rates that would enable both the Treasury department to replace maturing debt while also positioning for the Fed to take on more supportive monetary policy. Lower longer-term rates could allow for more strength in housing, and long-term investment in the U.S, which could allow for stronger growth rates. This would be the ‘short term pain, long term gain’ scenario that’s been discussed in the media as part of the administration’s possible strategy.

But this comes with risks, as any major change does. First there might not be a softening in inflation, which was pointed out by Chair Powell on Friday, and that helped to drive equities lower after a bounce from earlier in the session at the 5123 level in SPX. But there’s also the prospect of collateral damage, such as more unwind of the Yen carry trade, which could function as a global de-leveraging event such as we saw last summer.

More U.S. Dollar weakness which is something that could be pushed by lower U.S. rates could further compel unwind of the USD/JPY carry trade. And given that low Japanese rates allowed for investment in several other markets, such as U.S. equities, that could bring another point of vulnerability to U.S. stocks if we do see USD-weakness continue.

This was a big deal last summer and it can fast become a problem again, especially if we see ‘currency manipulation’ targeted as part of Trump’s reciprocal tariffs on Japan.

With that said, the move in SPX is quite difficult to chase at this point given how much it’s already built, with daily RSI currently showing below the 25 level. The 5k level is an area of obvious support potential for the index but for sellers, there’s two rather large gaps sitting atop current price that could function as resistance potential, and both have some relation with longer-term dynamics in the index.

The first resistance zone spans from the 5400 level down to 5292 which was the Friday gap. This spans across the 5340-5402 support zone that I had looked at in the 2025 Forecast, and notably, this area has not yet offered support. But, given the gap-through that zone on Friday, it now presents as resistance potential.

Above that we have the Thursday gap which runs all the way from the 5670 Wednesday close down to the 5492 Thursday open. Also of interest inside of that zone would be the 5500 psychological level and the 5571 swing-low from Wednesday.

For deeper support – the 5k level is of note and that’s followed by the 4818 level, which was the 2022 high before the FOMC rate hike campaign drove a reversal in U.S. equities.

SPX Daily Price Chart

--- written by James Stanley, Senior Strategist