Earlier this week, CNBC published an article with a headline that seemed fanciful at best – misleading at worst.
You may have seen it: “The magic S&P 500 number that would mean this is a new bull market and not just a bear bounce”.
The article goes on to say…
“Since 1950 there has never been a bear market rally that exceeded the 50% retracement and then gone on to make new cycle lows,” Jonathan Krinsky, a technical analyst at BTIG, said in a note late [Aug. 4]. “Therefore, if the S&P 500 were to exceed 4,231, we would have to assume that June was the low for this cycle.”
All we can say about that is… not so fast. There’s far more involved that would propel us into a bull market than just a “magic” number on the S&P 500.
Because up until Wednesday morning, the S&P 500 had been struggling against resistance between 4,150 and 4,175 (at the time of this writing, it’s hovering at about 4,254). “Resistance” just means that the security cannot break higher than that range.
This happens when traders become mentally “anchored” to the price at which they last sustained losses. Intuitively, this makes sense; imagine a bad trade experience from your past – you certainly remember the number at which you had to sell your shares or close out a loss. It stings, and you don’t forget it.
And if enough investors are in a similar position when the price comes back up, they are likely to increase their selling activity.
This is important because inflation is still high enough to motivate the Fed to continue raising interest rates through the end of the year.
The Other Side of the Equation
From a technical perspective, we aren’t optimistic that stock prices are going to rise another 12-14% like they did in July. However, there has been enough improvement in the economic outlook for us to feel a lot more confident about support holding for now in the 3,875-3,900 range.
From an investor psychology standpoint, support can be explained in a similar way to resistance. The last breakout level that investors started accumulating profits in May and July is likely to be the point at which investors start buying again.
A market like that is great for income traders because we can sell calls at the highs and buy them back or let them expire on the dips. That is the strategy we have been deploying over the last few months, and we have been able to use it to claw back a lot of the damage the market caused in the first and second quarter.
For example, out of the 75 trades we’ve given readers the chance to close this year at our elite trading research service, Strategic Trader, only three were “losers”… if you can call them that. Three of our stock trades broke even at 0.00%.
Everything else has been the opportunity for a gain, which gives us a win rate of 96%.
Based on the information we have available to us right now; we think the major indexes like the S&P 500 will have a tough time sustaining a break above resistance in the short term.
That’s not an ideal scenario, but we also expect nearby support to easily hold. Income-centered investing is the name of the game right now, and in this short video presentation, we explain how you can use it to your advantage – just click here.
John and Wade