S&P 500 FORECAST:
- S&P 500 rises at the start of the week, reaching its best levels since August 2022
- Technicals remain positive, but caution is warranted
- The index’s proximity to a key resistance area and its overbought condition may pave the way for a pullback in the near term
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The S&P 500 charged higher at the start of the new week, reaching its best levels since August 2022 and entering decisively into bull market territory, bolstered by a positive mood. In early afternoon trading, the index was up about 0.15% to 4,285, thanks in part to Tesla and Apple’s sturdy performance.
Taking into account recent moves, the S&P 500 has rallied nearly 23% from its October 2022 lows and a little more than 13% from its 2023 trough, driven primarily by the “AI” frenzy, with key players in the space, such as Nvidia, Microsoft and Alphabet, commanding the lead on Wall Street.
While sentiment has been on the mend of late, the continuation of the rally may be in jeopardy. First off, poor market breadth is a major red flag. For gains to be long-lasting and sustained, strong participation is usually necessary. This has not been the case in 2023.
Another headwind is the macroeconomic environment. Although the economy has been resilient, business activity appears to be downshifting rapidly, as reflected in the May ISM services PMI. If the U.S. enters recession later this year, the Fed may not yet have room to cut rates as inflation remains sticky. In this context, corporate earnings could slump, leading to lower equity prices.
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From a technical standpoint, the S&P 500 maintains a bullish profile, with the index establishing higher highs and higher lows impeccably, but caution is warranted for two reasons.
The first reason is that prices are currently approaching an important resistance near 4,315, which roughly corresponds to the August 2022 highs and the 61.8% Fibonacci retracement of last year’s sell-off. If history is any guide, sellers may regain the upper hand in this area.
The other reason is that the market looks stretched and close to overbought, as shown by the 14-day Relative Strength Index. The last few times this oscillator reached extreme readings near or above the 70 threshold, a pullback took place shortly thereafter. Traders should keep this in mind going forward.
In the event of setback, initial support appears near the psychological 4,200 mark, followed by 4,140. On the other hand, if bulls retain control and push prices higher, resistance lies at 4,315 and 4,350 thereafter.