S&P 500 technical analysis: here are the levels to watch carefully

To better understand the financial situation, we can divide it into two main phases: 1) Long-Term Bullish Phase (2009 – 2022): This is a phase that began way back in 2009 and is characterized by a bullish trend.
During this period, the index showed a constant increase in prices.
2) Long-Term Bearish Phase (From 2022): In 2022, a long-term bearish phase began, which continues to influence the market.
This phase has not yet been reversed and has led to a series of corrections in index prices.
To get a clearer view of these phases and current trends, we will use the Dow Theory.
This approach allows us to identify specific points during market corrections and understand the trend dynamics that have driven the performance of the index over the years.
Before continuing with the analysis, let's talk about two variables destined to affect the future trend.
The first key variable we need to consider is high interest rates.
Currently, 10-year rates have topped 4.50%, implying a real yield of 2.20%.
To find a similar period in the past, we need to go back to the period between 2006 and 2008.
This should give us an idea of the current restrictive phase.
Importantly, the current stock market has a negative risk premium (Figure 1.1), an unusual feature that raises several questions.
Crucially, the profits generated by companies in the S&P 500, which represent an uncertain return, are currently lower than the returns guaranteed by 10-year bonds, which represent a certain return.
This usually tends to push investors to prefer liquidity over assets.
An example of this is the recent performance of gold, which has fallen below $1900, despite challenges posed by real interest rates.
Second variable to consider is the expansion of public debt, not only in the United States but also in many other developed countries.
This aggressive increase in debt was used primarily to avoid a recession, often for political purposes rather than as a long-term strategy.
A clear contradiction emerges between the rhetoric of politicians, who promote the revival of consumption, and the strategies of central banks, who aim to moderate the economy to stem inflation.
This discrepancy is frequent in many advanced countries, especially in the United States.
The increase in public debt directly affects the financial market, as it leads to a greater demand for liquidity through new debt issues, which is not a favorable scenario for the stock market.
This dynamic seems the ideal context to incentivize savers to sell their assets, with the intention of taking out new debt.
This is particularly notable considering that the Federal Reserve (Fed) has been decreasing the quantity of bonds in its portfolio for some time, following a policy called Quantitative Tightening (QTT).
In chart 1.2 we observe the primary uptrend of the S&P 500 index, which began in October 2022.
There are some key observations to take into consideration: 1) Correction and Support: The recent correction stopped exactly on the line connecting the minimums rising in the period examined.
This is a positive sign.
Furthermore, the correction reached 33% of the increase over the last year, in line with an important rule of the Dow Theory; 2) Critical Level at 4230: Currently, the key level to pay attention to is 4230.
This level is important because it coincides with the primary bullish trendline and represents a recent turning point; 3) Indications of Reversal: There are some indications that raise concerns.
Recently, two technical patterns have emerged: a bearish head and shoulders and a congestion triangle (figure 1.3).
Their complete formation occurred with the breakup of the 4330/4350 area.
Now, the index needs confirmation of a return to these levels to maintain the bullish trend.
4) Watch out for 4230/4200: The strength of the area between 4230 and 4200 is uncertain at the moment.
A break below this level could confirm fears of a trend reversal, with worrying implications for the medium-term future of the index.
In summary, the chart shows a complex situation with a potential trend reversal in play.
The critical level to watch out for is 4230, and a break below this level could indicate a negative turn for the S&P 500 Index.
In 2022, we witnessed a significant market correction, the low point of which was surprisingly close to the 33% rally that began in 2009.
The positive reaction from the 3500 level gave rise to the primary 12-month trend, which was initially considered one of the most controversial rallies in history.
This is because it developed in an environment of rising rates, falling profits and shrinking liquidity.
Some of these factors, except corporate profits, appear to be even more evident today, with the market banking on a profit recovery after the second quarter decline.
Despite the efforts of the 12-month primary trend, the S&P 500 index failed to overcome the previous high of 4800, stopping at 4600 (figure 1.4).
This raised concerns as it represented a major turning point beyond which the bearish cycle that began in early 2022 could be reversed.
In addition to this, the presence of the reversal patterns described above, many of which have already been completed, together with the failure to exceed 4600 suggests a scenario to be considered carefully.
In summary, a confirmed break of the 4230 level could strengthen the case for a broader bearish cycle, with possible targets between 3780 and 3280.
The overall situation suggests that we are entering a more delicate market phase, so attention must be focused on the short-term evolution, with particular attention paid to the 4230/4200 level.