The S&P 500 soared past the 5000 mark on Friday, riding a wave of increasing optimism that the Federal Reserve would implement six rate cuts this year. The soaring progress towards this milestone underscores the market’s resilience amidst a shifting economic landscape.
The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) remained steady at 3.3% for the final quarter of 2023. Eyes are now turned towards February 13 for the release of January’s CPI data. Analysts are anticipating a noteworthy slowdown in the yearly headline inflation rate from December’s 3.4% to 3%, reflecting potential stabilization in economic indicators.
The stock market has defied conventional expectations since Jan. 19, surging to unprecedented heights almost every trading session. This unstoppable ascent has been led by the Magnificent Seven, with five mega-cap stocks achieving record highs over recent months.
While the market momentum may appear invincible on the surface, caution flags have begun to wave. Both the S&P 500 and the SPDR S&P 500 (SPY) have entered overbought territory, signaling a potential short-term pullback on the horizon.
Experienced traders exploring opportunities within the SPY have options to leverage this momentum through Direxion ETFs. Bullish traders can consider entering a short-term position in Direxion Daily S&P 500 Bull 3X Shares (SPXL), while bearish traders can engage through the inverse ETF, Direxion Daily S&P 500 Bear 3X Shares (SPXS).
Leveraged Potential: SPXL and SPXS are triple-leveraged funds that aim to mirror the movements of the SPY, seeking a return of 300% or -300% on the benchmark index’s return over a single day.
It is crucial to recognize that leveraged ETFs are designed for active trading rather than long-term investments.
Interpreting the SPY Chart: The SPY’s relative strength index (RSI) approached the 72% zone on Friday, highlighting the ETF’s overbought status. When an RSI surpasses the 70% threshold, it often serves as a cautionary signal for short-term technical traders.
- The SPY has been traversing a steep upward trajectory since Oct. 27, consistently marking higher highs and higher lows on the daily chart. The most recent higher low materialized on Jan. 31 at $482.86, with the latest confirmed higher high reaching $491.52 on Jan. 29.
- A subsequent higher low is anticipated in the coming trading days, given the elevated RSI and declining volume – indicative of waning bullish momentum. Should a retracement occur, bullish traders will look for the ETF to rebound from the lower ascending trend line within the rising channel pattern, within which the SPY has operated since Nov. 9.
- Bearish traders will hope for a surge in bearish volume to breach the bottom trend line of the rising channel, potentially intensifying the downward pressure and signaling a prolonged retracement. If this transpires, the SPY is likely to encounter at least temporary support at the 50-day simple moving average.
- The SPY faces resistance at the psychologically significant $500 level and at $505, while finding support below at $496.05 and $491.42.
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