The recent surge in the S&P 500 has brought it face-to-face with a critical juncture, raising questions about the stock market‘s future trajectory. This article dives into the current situation, analyzing the significance of a key technical indicator and potential implications for the index.
S&P 500 Nears 50-Day Moving Average, a Line in the Sand
The S&P 500 has been on a tear, rising more than 25% since late October. However, this rapid ascent has brought the index to within striking distance of its 50-day moving average, a technical indicator closely watched by investors. On Thursday, the S&P 500 briefly traded just 33 points away from this key level, marking the closest intraday encounter since November 2023.
Technical Experts: Breaking Below Support Could Signal Downturn
Market technicians view a breach below the 50-day moving average as a potential warning sign. If the S&P 500 falls through this support level, it could indicate a reversal of recent gains and a more significant pullback. Craig Johnson, chief market technician at Piper Sandler Technical Research, emphasizes that the market is overdue for a correction after such a rapid rise. He highlights the lack of any substantial pullbacks towards the 50-day average in the past five months.
Rally Fueled by Rate Cut Hopes, Now Faces Inflationary Reality
The initial momentum behind the S&P 500’s rally stemmed from widespread anticipation of aggressive interest rate cuts by the Federal Reserve in 2024. However, this scenario appears increasingly unlikely following a series of hotter-than-expected inflation readings. This shift in economic data throws cold water on the rate cut narrative and presents a potential headwind for the stock market.
End of Longest Streak Above Moving Average Hints at Shifting Tides
The S&P 500’s exceptional run saw it trading above its 50-day moving average by an unusually wide margin for a record-breaking 53 days. This streak, the longest since 1998, finally ended on April 4th, signaling a potential turning point in the market’s momentum. The recent decline in the 14-day relative strength index (RSI) also suggests a loss of upward momentum for the S&P 500. While the index remains near its all-time high, the RSI currently sits around 55, after dipping to a five-month low late last week. Traditionally, readings above 70 on the RSI indicate an overbought market.
Looking Ahead: Key Levels to Watch
As of Thursday, the S&P 500’s 50-day moving average sits at 5,105.73. If the index falls below this level, technicians like Johnson will be closely watching 4,990 as the next potential support zone. This level coincides with a 23% retracement of the S&P 500’s rally since its October low point. Katie Stockton, founder of Fairlead Strategies, reminds us that intermediate and long-term moving averages often correspond with areas of support or resistance for the market.
Conclusion: A Crossroads for the S&P 500
The S&P 500 finds itself at a critical juncture. Whether it can hold above its 50-day moving average will likely determine the index’s near-term direction. A break below this support level could trigger a correction, while a sustained move higher could indicate a continuation of the rally. Investors will be closely monitoring the index’s performance in the coming days and weeks for clues about the market’s next move.
