S&P 500 MEETS RESISTANCE AT ITS 200-DAY MOVING AVERAGE AS BOND YIELDS REBOUND -- SUMMER STOCK RALLY HAS REACHED CRITICAL JUNCTURE AS IT TESTS MAJOR RESISTANCE LINES
S&P 500 STALLS AT 200-DAY AVERAGE...The two month rally in stocks has run into a couple of formidable resistance lines while in an overbought condition. Last week's message showed the S&P 500 nearing a test of its 200-day moving average and a falling trendline drawn over its January/March peaks. Chart 1 shows the SPX starting to pull back after touching both lines (see red and blue arrows). In addition, its 14-day RSI line in the upper box has moved into overbought territory over 70. That combination suggests that the summer rally may have run its course and may be peaking. The flat black lines also show the SPX having retraced just over 50% of its first half losses. That increases the odds that the rally has run into serious overhead resistance.
BOND YIELDS BOUNCE... Falling bond yields have been one of the factors supporting the stock rally. Chart 2, however, shows the 10-year Treasury yield rising above its 50-day moving average on Friday. An upturn in bond yields could put additional downside pressure on stocks. A couple of key sectors are also backing off from moving average resistance.
MORE 200-DAY LINES... Two key sectors that helped lead the summer rally are also meeting moving average resistance. Chart 3 shows the Consumer Discretionary SPDR (XLY) pulling back from its 200-day line (red arrow). Chart 4 shows the Technology SPDR (XLK) also pulling back from its 200-day line. In addition, their RSI lines in the upper boxes are starting to weaken near overbought territory. Their daily MACD lines in the lower boxes are also close to turning negative. Volume has also been lighter during the summer rally. All of which suggests that the rally is stalling.
ENERGY MAY BE REBOUNDING... Another factor supporting stock prices over the past two months has been a pullback in energy prices and stocks tied to them. Chart 5, however, shows the Energy SPDR (XLE) climbing to the highest level since June. Its relative strength is also improving. That can be seen by the gray area which plots a relative strength ratio of the XLE divided by the S&P 500. After rising during the first half of the year, the ratio peaked during June just as stock prices were starting to rally. The ratio has started to rise again with energy being one of the week's strongest sectors. That bears watching because energy stocks are closely tied to the trend of oil. Any hint of higher oil prices might also make investors more nervous about the trend of stocks. That may also explain why defensive sectors like consumer staples and utilities were the week's strongest sectors with energy in third place.
STOCK INDEXES IN CRITICAL TEST... What stocks do from here is very important from a technical standpoint, and should help determine if the summer rally is just a bear market bounce or something more lasting. This is precisely where the rally in stocks should fail if the major downtrend is still intact. A 50% rebound up to 200-day moving averages and a major downtrend line represents a major test of the downtrend that started earlier in the year. Any serious pullback from current levels would suggest that the summer rally has probably run its course and would also keep the market's major downtrend intact. That also warrants a more cautious view on stocks from current levels.
