Medium term
Trade view / 07 July 2016 at 10:19 GMT

S&P 500 — Breakout or no breakout?

Trader /
United States

The S&P 500 is higher by about 3% year-to-date and continues to defy economic reality (slowing growth). Part of the reason for the continued bid in this benchmark index is the drop in bond yields, making dividend-paying large-cap stocks more attractive. So, will the S&P 500 soon break to fresh all-time highs?

It's no secret that we live in unprecedented times where bond yields are at near record lows, and increasingly we are even seeing negative yields. This negative-yield environment has been supportive for the S&P 500 thus far, but it doesn't speak to much economic growth. In my opinion, even if we were to see a yield-chasing breakout in the S&P 500 in the near to intermediate term, I have serious doubts such a move would be sustainable through a 6-12 month lens.   

Friday's jobs report is the next big toggle point for the S&P 500 and, rather than being anticipatory, I want to see how stocks react to the news first, rather than making any sizable bets ahead of the number. 

On the multi-year chart, we see that the S&P 500 ETF (SPY) has been consolidating for the better part of the past 18 months, and at the February lows, bounced off its red 200-week simple moving average. Clear resistance looms just above around the $213 area on a weekly closing basis.

S&P 500 ETF
Source: eSignal

On the weekly chart, we note that last week the SPY ETF gave us a bullish outside/engulfing candle as stocks reversed higher after the initial Brexit shock. This is no reason to buy or hope for a breakout in the S&P 500 just yet, but it is most certainly worth respecting.

S&P 500 ETF
Source: eSignal

Finally, on the daily chart, we see that the most recent multi-day rally has brought the SPY ETF back up to diagonal resistance, and the longer this index/ETF can hold here, the better the odds ultimately become of a next leg higher.

S&P 500 ETF
Source: eSignal

Management and risk description

From a risk management perspective, I believe it is better for traders to wait for a potential breakout in the SPY ETF to occur above the $213 area on at least a daily closing basis, rather than to anticipate it.


Entry: buy the SPY ETF or CFD at $213 or higher.

Stop: $209.50.

Target: $220.

Time horizon: 2-4 weeks.

— Edited by D. Deacon

Non-independent investment research disclaimer applies. Read more
08 July
Feders Feders
hello!, today SPY reached 212,65, is this a good point of entry regarding this trade or we've better wait for 213?.Thanks !


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