S&P 500 & Nasdaq Rebound from Key Support; How Much More Upside?

S&P 500, SPX, NASDAQ 100, NDX – OUTLOOK:

• The S&P 500 index and the Nasdaq 100 index have rebounded from key support.
• Oversold conditions, light positioning, and positive seasonality raise the bar for a material downside from here ahead of the upcoming earnings season.
• What are the outlook and the key levels to watch in the three US indices?

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Despite the escalation in geopolitical tensions, US indices have rebounded from key support after an apparent dovish shift by US Federal Reserve officials. Dallas Fed president Lorie Logan and Fed Vice Chair Philip Jefferson highlighted the recent tightening in financial conditions as a result of the sharp rise in yields, lessening the need for further interest rate hikes.

Oversold conditions, light positioning, and positive seasonality raise the bar for a material downside in US equities ahead of the upcoming earnings season. At the same time, rising US real yields/cost of borrowing pose constraints on the upside.

S&P 500: Holds 200-DMA support

The S&P 500 is holding above quite strong converged support on the 200-day moving average and the lower edge of a declining channel from August,a risk highlighted in the previous update. This follows a fall below vital converged support, including the June low of 4325 and the lower edge of the Ichimoku cloud on the daily charts last month, which confirmed that the broader upward pressure had faded.

S&P 500 Daily Chart

Chart Created by Manish Jaradi Using TradingView.

Unless the index is able to clear, at minimum, the early-September high of 4542, the path of least resistance is broadly sideways at best. Ahead of 4542, the index needs to deal with the mid-August low of 4335 followed by the upper edge of the channel. On the downside, any break below the 200-day moving average could expose the downside initially toward the end-April low of 4050.

S&P 500 Weekly Chart

Chart Created by Manish Jaradi Using TradingView

Zooming out from a multi-week perspective, the weakness since August reinforces the broader fatigue, as pointed out in previous updates. See “US Indices Hit a Roadblock After Solid Services Print: S&P 500, Nasdaq,” published September 7; “US Indices Rally Beginning to Crack? S&P 500, Nasdaq Price Setups,” published August 3; “S&P 500, Nasdaq 100 Forecast: Overly Optimistic Sentiment Poses a Minor Setback Risk,” published July 23.

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Nasdaq 100: Rebounds from Key Support

The Nasdaq 100 index’s rise on Monday above minor resistance at last week’s high of 14900 has reduced immediate downside risks. This follows a rebound from crucial converged support: a horizontal trendline from June (at about 14550-14560), the lower edge of a slightly downward-sloping channel from July, and the mid-August low.

Nasdaq 100 Daily Chart

Chart Created by Manish Jaradi Using TradingView

This support has been vital and a break below would trigger a head & shoulders pattern – the left shoulder is at the June high, the head is at the July high, and the right shoulder is at the early-September high. Still, for the bearish pattern to be negated, the index needs to clear significant hurdles at the early-September high of 15618, not too far from the July high of 15932.

From a big-picture perspective, as highlighted in arecent update, the momentum on the monthly charts has been feeble compared with the huge rally since late 2022, raising the risk of a gradual weakening, similar to the gradual drift lower in gold since May. For more discussion, see “Is Nasdaq Following Gold’s Footsteps? NDX, XAU/USD Price Setups,” published August 14.

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— Written by Manish Jaradi, Strategist for DailyFX.com

— Contact and follow Jaradi on Twitter: @JaradiManish