S&P 500 Forecast: Chip Selloff and Weak Breadth Signal Potential Pullback Before Next Rally

S&P 500 Heat Map Shows Chip Selloff

It’s a bloody Friday. The market appears to have lost its footing. Microsoft is trying to save the day, up 3.65%, helped by fresh positive news around Pershing Square taking a stake. Apple is also firm.

But the pressure is heavy in the AI and chip trade with NVDA (-3.97%), AVGO (-3.94%), AMD (-4.00%), INTC (-6.71%), and MU (-5.54%) declining. The narrative today is that chip leadership could be stretched. Duh.

Tesla is also down 4.10%, with traders still watching China FSD approval and the Trump/Musk trip narrative, while Caterpillar is off 4.21%, likely cooling after its AI power demand rerating.

What a way to end the week.

Microsoft Cushions the S&P 500, But Nvidia, Broadcom, AMD, Intel, Micron, Tesla and Caterpillar Drag Risk Appetite Lower

S&P 500 Breadth Weakens Near Highs

It’s getting less and less. Less and less stocks are trading above their 20-day MA. Fewer names are carrying the move. It feels to me some sort of pull back is coming because a handful of names cannot carry the S&P 500 Index for long. But this might be a great time to see where the Index will settle and identify where breadth would pick back up. My thinking is that a 30% crossover will be a great trigger, followed by a 50% crossover for confirmation.

S&P 500 Index Holds Above MAs, But Only 38.2% of Stocks Remain Above their 20-SMA

Daily S&P 500 Chart Showing Price Near 7,429, above the 20-SMA, 50-SMA, 100-SMA and 200-SMA, while breadth weakens to 38.2%

Source: StockCharts

US Industrial Production Beats Forecast

US Industrial Production data was released today, showing a monthly gain of 0.7% versus a 0.3% forecast. This is a solid rebound particularly after April’s negative print, and it tells me the industrial side of the economy still has some proper demand underneath it.

Industrial Production Rose 0.7% MoM, Beating the 0.3% Forecast and Reversing April’s Contraction

S&P 500 Renko Rally Cools Near All Time Highs

Stocks can’t go up everyday. If it did then that’s a real problem. The S&P 500 Index broke through its Supertrend indicator which caused it to flip to red. While the Index is above both above the 50-SMA and 500-SMA, the RSI is trending lower after crossing below overbought levels. The Z-Score SMA is doing that as well. Expectations are for the S&P 500 Index to find support at the 50-SMA and consolidate for a little while before it makes another set of all time highs. The bulls need a rest.

20-Brick Renko Shows the S&P 500 Index Holding Its Bullish Structure Despite a Mild Pullback

S&P 500 Index 20-brick Renko chart showing price above the 50-SMA and 500-SMA, with RSI near 56 and Z-Score SMA near 0.9.

Source: TradingView

The Verdict

Current Trend Direction: Bullish

Bias: Positive

Support Levels: 7,100, 6,625

Resistance Levels: 7,450, 8,150

Medium Term Path: From where I sit this rally is far from over. Stocks can’t up all the time. If it did that’ll be the real problem. This is all a healthy part of the market movements. The bigger picture is that we continue to retrace towards the 50-SMA on the Renko, there’s a bit of consolidation, followed by a return to all-time highs. Sounds simple because it is. But we need to watch short term market breadth to help us determine when this pullback will be over. If the VIX crosses back above 20 (it’s around 18 at the moment), we might have to start to think how much lower the S&P 500 could go.