The Technical Indicator: Charting the approach of major resistance, S&P 500 extends bear-market rally

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Technically speaking, a bear-market rally attempt remains underway in the wake of an historic, and severely damaging, March downdraft.

Against this backdrop, the S&P 500 has sustained the bulk of its gains, asserting a flag-like pattern amid still muted late-month selling pressure.

Before detailing the U.S. markets’ wider view, the S&P 500’s SPX, -0.76%  hourly chart highlights the past two weeks.

As illustrated, the S&P has extended its rally from major support (2,190). The upturn has trended atop the 20-hour moving average, signaling that near-term bullish momentum is intact.

Tactically, slightly more distant overhead rests at 2,650, a level matching the 38% Fibonacci retracement of the 2020 crash. The pending test should add color.

Similarly, the Dow Jones Industrial Average DJIA, -0.72%  has held tightly to its range top, signaling still muted selling pressure for now.

Tactically, the 22,000 area has marked an inflection point.

On further strength, firmer resistance spans from about 22,550 to 22,595.

Against this backdrop, the Nasdaq Composite COMP, -0.23%  has reclaimed major resistance.

The specific area matches its breakdown point – the 7,700-to-7,712 area – detailed previously.

Tuesday’s early session low (7,708) has matched the inflection point. Constructive price action.

On further strength, the Nasdaq’s 20% pullback mark (7,854) closely matches its 38% retracement of the 2020 downdraft (7,856).

Widening the view to six months adds perspective.

On this wider view, the Nasdaq has extended a reversal from 14-month lows.

To reiterate, the 7,712 area marks a bull-bear inflection point. Recently muted selling pressure near resistance signals waning bearish momentum.

More distant overhead at 7,855 is better illustrated on the hourly chart. The pending test from underneath should be a useful bull-bear gauge.

Looking elsewhere, the Dow Jones Industrial Average has sustained a reversal from three-year lows.

Against this backdrop, the index is traversing a less-charted patch. Two inflection points — illustrated on the four-year chart — remain in play.

• The late-2017 breakout point of 22,179.
• The 2018 low of 21,712.

Tactically, a sustained reversal atop these areas would mark progress.

Separately, consider that the Dow is vying Tuesday to snap a stretch of 16 straight 850+ point daily ranges.

Meanwhile, the S&P 500 has rallied amid technical price action.

Recall that the March low (2,191) closely matched major support (2,190), detailed previously. (Also see, for instance, the Dec. 13, 2016 review.)

More immediately, S&P 2,650 matches notable resistance, an area also detailed on the four-year chart in the next section.

The bigger picture

As detailed above, the major U.S. benchmarks have sustained a recovery attempt, rising in the wake of an historic March plunge.

Against this backdrop, relative market volatility continues to fade as the CBOE Volatility Index vies to register a nearly three-week low.

So collectively, a bear-market rally attempt remains in play, though sustainability, and upside follow-through, remain a question mark.

Moving to the small-caps, the iShares Russell 2000 ETF has reversed from four-year lows amid decreased volume.

From current levels, last week’s high (117.60) is followed by gap resistance at 119.96 and 124.17. Follow-through atop these areas would strengthen the backdrop.

Meanwhile, the SPDR S&P MidCap 400 ETF has reversed from six-year lows.

Here again, the bullish reversal has been fueled by progressively decreased volume.

Meanwhile, the SPDR Trust S&P 500 has rallied from three-year lows. Its reversal has been fueled by decreased, but still respectable, total volume.

Placing a finer point on the S&P 500, the index has spiked from major support.

The specific area matches the mid-2016 range top (2,190), detailed previously. To the extent the S&P eventually retests the March low — across, say, the next two months — the 2,190 area marks a major bull-bear battleground.

More immediately, the post-breakdown peak (2,637) — established last week — has registered slightly under two inflection points:

• The 38% Fibonacci retracement of the 2020 crash (2,650).
• The 200-week moving average, currently 2,646.

Tactically, the pending response to major resistance, across the next several sessions, will likely add color. Follow-through atop this area would signal waning bearish momentum, strengthening the S&P 500’s backdrop.

Charting the S&P 500’s bullish key reversal

Staying with the weekly chart above, last week registered as a massive bullish engulfing pattern, detailed previously.

Specifically, the week’s body — defined by the weekly open and close — engulfed the prior week’s body.

In this case, the pattern also registered as a key reversal from three-year lows. (A key reversal registers to conclude major trends. Bullish engulfing patterns do not necessarily punctuate major trends.)

As detailed previously, sustainability and upside follow-through remain an open question. Nonetheless, the massive reversal stands out as price action that would not conventionally register if the market crash were intact.

Recall that the pattern originates from major support (2,190) and has been fueled by improved market internals. Moreover, market sentiment continues to improve, as measured by the Volatility Index, though the benchmark is receding from an historic spike. (Also see the March 25 review.)

Returning to specific levels, the S&P 500’s recovery attempt has been punctuated by technical price action. To reiterate:

• The March low (2,191) has matched major support (2,190).
• The top of last week’s gap (2,344) matched an inflection point at the 2018 low (2,346).
• Wednesday’s close (2,476) closely matched next resistance (2,478).
• Last week’s high (2,637) registered slightly under the 200-week SMA and the 38% retracement (2,650).

Against the current backdrop, the S&P 2,478 area — also detailed on the four-year chart — marks a useful inflection point. The bear-market rally attempt gets the benefit of the doubt barring a violation.

More broadly, the S&P 500’s intermediate- to longer-term bias remains bearish pending repairs.

Also see: Charting a bear-market rally attempt, S&P 500 spikes from major support (2,190).

Tuesday’s Watch List

The charts below detail names that are technically well positioned. These are radar screen names — sectors or stocks poised to move in the near term. For the original comments on the stocks below, see The Technical Indicator Library.

Drilling down further, the United States Oil Fund USO, -0.45%  has extended its March plunge to record lows. The fund tracks the price of West Texas Intermediate (WTI) light, sweet crude oil. (Note that WTI crude (not the USO fund) has notched an 18-year closing low.)

Fundamentally, the crude-oil price breakdown has contributed to broad-market instability.

Technically, the shares started March with a massive plunge, getting cut in half across about two weeks.

Following a flat mid-March rally attempt — fueled by decreased volume — the shares have confirmed the downtrend this week.

Tactically, the breakdown point, circa 4.30, is followed by gap resistance (4.53) and the post-breakdown peak (5.16). An eventual close atop the latter would mark an early step toward stabilization.

Meanwhile, the SPDR Gold Shares ETF GLD, -1.88%  continues to act relatively well amid a challenging backdrop.

As illustrated, the shares have weathered the mid-March downdraft, then pressured amid liquidity constraints, or a backdrop of “sell what you can sell, not necessarily what you want to sell.”

The subsequent reversal punctuates a successful test of major support. Recall that the March low (136.12) closely matched an eight-month range bottom defined by the October low (136.19).

More immediately, the shares are digesting the rally from support, consolidating amid decreased volume. Bullish price action.

Tactically, the former breakdown point (149.00) closely matches the 50-day moving average. This area pivots to support. Delving deeper, the bottom of the gap (146.90) is followed by the former range bottom (145.70).

Revisiting the traditional sector leaders — Key groups rise amid major damage

Moving to specific groups, the 2020 market downdraft has inflicted extensive sub-sector damage. Quickly consider the traditional sector leaders: the transports, financials and technology sector.

To start, the iShares Transportation Average ETF IYT, -0.09%  has reversed from four-year lows.

Recall that the early-March downdraft punctuated a failed test of the breakdown point (175) from underneath.

From current levels, a bull-bear inflection point holds around 144.50 to 144.80, levels matching the top of the gap and the post-breakdown peak. Follow-through higher would mark technical progress.

More broadly, the group has plunged through a less-charted patch — illustrated on the five-year chart — punctuating a massive double top defined by the 2018 and 2020 peaks. Though the prevailing bounce has room to follow-through, for the near-term, an extended basing period would be expected before the next durable leg higher.

Meanwhile, the Financial Select Sector SPDR XLF, -1.40%  has reversed from three-year lows.

The preceding strong-volume downdraft punctuated a failed test of the 200-day moving average at the early-March peak.

Also notice the recent death cross, or bearish 50-day/200-day moving average crossover. Though often a lagging indicator, the crossover signals that the intermediate-term downtrend has overtaken the longer-term trend.

Tactically, resistance spans from about 21.40 to 21.80, levels matching the post-breakdown peaks. Follow-through atop this area would strengthen the group’s backdrop.

Finally, the Invesco QQQ Trust QQQ, -0.03%  tracks the Nasdaq 100 Index, offering a large-cap technology sector proxy. The QQQ has asserted a bearish backdrop, though it remains relatively stronger than the other groups.

As illustrated, the group has reversed from 52-week lows, rising to reclaim its breakdown point. Constructive price action in the current market context.

On further strength, additional overhead (194.50) is followed by the 200-day moving average, currently 199.70. The pending test of each area will likely add color.

Summing up the sector backdrop

Collectively, key groups have reversed from the March low, potentially punctuating the 2020 market downdraft. Still, major technical damage has been inflicted.

An extended basing period would be expected — and would ideally register, in lieu of massive single-day spikes — before the next durable market uptrend. Each group’s response to its pending technical tests should add color.

Editor’s Note: This is a free edition of The Technical Indicator, a daily MarketWatch subscriber newsletter. To get this column each market day, click here.

Still well positioned

The table below includes names recently profiled in The Technical Indicator that remain well positioned. For the original comments, see The Technical Indicator Library.