S&P500 and Nasdaq: Rally Faces Make-or-Break Levels Into Friday

S&P 500 Eyes Eighth Straight Win

Stock futures are pointing higher Friday morning. Small gains overnight across the Dow, S&P 500, and Nasdaq. If nothing breaks between now and the close, the S&P 500 is looking at eight straight weekly gains. The Dow is on track for its third positive week out of the last four. The Nasdaq has been up seven of the last eight weeks.

S&P 500 Index (SPX) Technical Analysis

The S&P 500 Index closed higher on Thursday and inside the key retracement zone that is likely to determine whether buyers regain control or sellers start to take over.

The main trend is up according to the daily swing chart, but the minor trend turned down earlier in the week, signaling a shift in momentum.

A trade through 7517.12 will signal a resumption of the uptrend. The new main bottom is 7333.68, up from 6316.91. This is a significant change because a trade through that main bottom will change the main trend to down and that could trigger the start of a major correction.

The new main range is 7517.12 to 7333.68. The market is currently testing its retracement zone at 7425.40 to 7447.05. Trader reaction to this zone will determine the near-term direction.

A sustained move over 7447.05 will indicate the presence of buyers. If this move generates enough upside momentum then look for a near-term test of 7517.12 and beyond.

A sustained move under 7425.40 will signal the presence of sellers. This usually occurs when a secondary lower top is formed. As of Thursday’s close, it’s 7465.96. It could move higher on Friday, but the idea is to form a high and a lower-low than Thursday’s low at 7389.48. If we get that formation, sellers could start to come in hard, but the sell-off will be labored initially because of the swing bottom at 7333.68 and the two pivots at 7312.49 and 7281.84.

The last pivot at 7281.84 is a potential trigger point for an acceleration to the downside with 7153.57 the primary downside target. That’s another potential breakdown level with the 50-day moving average at 6971.94, 50% of the entire rally at 6917.02 and the 200-day MA at 6802.01, the major downside targets.

Watch the price action and read the order flow at 7425.40 to 7447.05 on Friday. It will determine whether buyers or sellers are in control or whether the market is getting stronger or weaker.

Nasdaq Composite (IXIC) Technical Analysis

The Nasdaq Composite is in a similar position as the S&P Index. The main trend is also up and the market is testing a key retracement zone that should determine its near-term direction.

The main range is 26707.14 to 25701.44. A trade through 26707.14 will signal a resumption of the uptrend. A move through 25701.44 changes the main trend to down.

The 50% to 61.8% retracement zone of the main range is 26204.29 to 26322.96. Trader reaction to this zone will determine the near-term direction. On Thursday, the index closed inside this zone. The market is asking traders to make a decision, either buy strength and trigger a breakout over 26322.96, which could lead to a new record high. Or, sell weakness through 26204.29, hoping it fuels an eventual breakdown under 25453.07.

I believe that 25453.07 is the potential trigger point for an acceleration to the downside with the first key target at 24751.48. Other major targets include the 50-day moving average at 23846.21, a 50% level at 23698.70 and the 200-day moving average at 23061.13.

Yields Took the Week Hostage

Yields are the story this week and not in a comfortable way. The 10-Year U.S. Treasury yield pushed borrowing costs to levels not seen in years. The 30-year Treasury yield punched above 5.19% earlier this week, the highest level since before the financial crisis, before pulling back to around 5.09% Thursday. When yields move like that, fixed income starts competing with equities for money and stocks feel it.

Oil Dropped. Stocks Recovered.

Thursday’s session showed how quickly this market can reverse. Stocks were struggling, then West Texas Intermediate crude oil dropped nearly 2% and Spot Brent crude dropped more than 2%. Hopes that Middle East negotiations could reduce energy market disruptions gave traders a reason to buy. Oil gave stocks room to breathe and they took it.

Oil Is Back Up Friday

The breathing room did not last. West Texas Intermediate crude oil and Spot Brent crude are both posting gains early Friday after three straight sessions of losses. The rebound has not rattled overnight U.S. stock futures so far, but the direction has reversed and traders are watching.

Iran Talks Still the Wild Card

Washington signaled progress toward a possible agreement. Tehran pushed back and created fresh uncertainty. Concerns about shipping route disruptions are still live and energy officials are flagging strong summer travel demand as additional pressure on global supply. Nothing is resolved and the market knows it.

Asia Held Up Overnight

Japan’s markets moved higher after inflation data came in softer than expected. That reduced pressure for an immediate rate increase. Other major Asian indexes also moved higher as traders weighed global growth and geopolitics.

Earnings Kept the Floor

Several companies reported strong results after Thursday’s close. Software, retail, technology, and consumer names all posted gains. Earnings kept investor attention on company performance and off the yield situation, at least for a session.

What to Watch

Two things are unresolved going into Friday’s close and they are pulling in opposite directions. Yields pushed to multi-year highs this week and have not given back much. Oil reversed three sessions of losses overnight and is moving higher again. A market trying to hold eight straight weekly gains has to absorb both of those at once and that combination keeps the bulls from getting comfortable.

The S&P 500 retracement zone at 7425.40 to 7447.05 is the level that settles it. Buyers who hold that zone have a clear path toward 7517.12 and a new record. Sellers who break it have a secondary lower top forming and the next real test does not show up until 7281.84, which is the trigger for the bigger move lower.

More Information in our Economic Calendar.