Chart of the Day: S&P 500 Recovers But Momentum Slows

During Monday's Wall Street session, it appeared early on that the day's activity would be a bloodbath as the index continued to fall rapidly. But two hours later, traders switched from selling to buying and the broad benchmark recovered from a 2.03% loss, approaching the December 20 low.

According to the current story, dip buyers were the ones who softened the sell-off on yesterday's fifth day – the index's longest losing streak since September.

However, there could be a more tangible inter-market connection to the sharp upward turn: Yesterday again, government bond yields fell from their highest levels since January 2020. From an equity perspective, the recent sell-off in technology stocks was driven by the prospect of higher rates that put pressure on companies whose inventories had the frothiest, highest valuations.

Lowering yields can be seen as a signal that the markets may have already priced in higher rates, at least for now. Sure enough, mega-tech companies were leading the SPX's upswing.

Indeed, the  was the only one to close in green on Monday. Accordingly, the index was the only indicator to gain and closed, albeit barely, in positive territory.

So what could be the expected trajectory for the S&P 500 index?

The index found support from its upward trendline and closed out its intraday lows near session highs to form a bullish hammer. This reinforces the rising channel of the benchmark (yellow).

However, astute traders would notice that the channel is losing height (green). In a similar vein, the Moving Average Convergence Divergence's (MACD) short MA crossed below its long MA, showing that current pricing is weakening against longer prices.

The Relative Strength Index (RSI) fell below the uptrend line. The MACD (whose strength as an indicator lies in providing positive or negative divergence) and the RSI both yielded negative divergences when they failed to support the price rise from the November to January peaks.

The same negative divergences appear in the 4-hour and weekly charts, showing that momentum is weakening across a broad spectrum of time frames, not supporting recent price gains.

Forecast: While the S&P 500 remains in an uptrend, it is slowing, which could be the first sign of a top. have to wait for the price to reach new highs to extend the uptrend with the support of the indicators. Alternatively, they can wait for a trend reversal to consider shorting the index.

Medium traders would risk a long position – given the attractive risk-reward ratio of being on top of the support – as the price approaches Monday's lows and finds support.

Aggressive traders can go long on a coherent trading plan that matches their budget, timing and risk tolerance. Here's an example:

Trade sample – moderate/aggressive long position

Input: 4,600
Stop Loss: 4,580
Risk: 20 points
Target: 4,700
Reward: 100 points
Risk Reward Ratio: 1:5

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