On Wednesday (May 8), the S&P 500 Index opened lower at 5,168.98, rising in the morning and consolidating afterwards, and closed at 5,187.67, down 0.03 points or 0.001 per cent. Month-to-date, it is up 3.02 per cent while year-to-date, it has increased by 417.84 points or 8.76 per cent.
Boston Federal Reserve president Susan Collins expressed her commitment to bringing inflation back to the central bank’s 2 per cent target, although she noted that there was “significant uncertainty” surrounding this outlook. “Recent data leads me to believe this will take more time than previously thought,” said Collins.
In a bid to combat inflation, the Federal Open Market Committee began tightening monetary policy in March 2022, increasing its benchmark lending rate by 525 basis points (bps) through July 2023.
Since then, it has maintained steady interest rates, with its latest pause occurring last week. The US 10-year yield increased 3.7 bps to 4.5 per cent on Wednesday, while the two-year rate increased by 1.1 bps to 4.84 per cent.
The S&P 500 Index experienced a significant gap up on Friday and broke its downwards trendline (as shown in the chart), indicating bullish momentum. This development potentially sets the stage for the index to challenge its previous all-time high (ATH) around the 5,264 mark, formed in early April.
Reaching this level is crucial as it serves as a resistance point before the index can venture into uncharted territory, allowing investors to speculate on its future trajectory.
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Bullish scenario
A breakthrough of the previous ATH of 5,264 will introduce bullish signals, with potential targets at key Fibonacci levels. The 61.8 per cent Fibonacci level, at approximately 5,334, and the 78.6 per cent Fibonacci level, around 5,420, could become subsequent targets.
Notably, the Relative Strength Index (RSI) also suggests that the index is not yet overbought, which supports the potential upward movement.
The gap-up area now acts as a strong support level, coinciding with the EMA-50 support zone between 5,064 and 5,101. In the event of a retracement, this area is expected to provide solid support for further bullish momentum.
Bearish scenario
However, a failure to hold the above-mentioned support levels could introduce bearish signals. The next support zone lies around the previous low of approximately 4,979, where the EMA-100 also should be. A breakthrough of this level may signal a reversal of trend and formation of an “M top”, a bearish technical pattern.
In such a scenario, the index could potentially revisit the 4,800 level or lower. This level corresponds to the previous resistance from December 2023 to January 2024, which may act as a critical support-turned-resistance zone. A decline to this level could signify a pullback of approximately 4 per cent.
The writer is equities specialist at Phillip Securities
