For the last six weeks, the S&P 500 Index (SPX) has been stuck in a tight three-percent range. This has not been a normal tight range for this bull market, however—we've seen big spikes and drops over the last couple of months but with no resolution following these moves. All the dips have been bought, and all the bounces have preceded another geopolitical headline that then shakes things up again. So what will finally lead to a resolution and break this market out of its current range?
The next big event for stocks is going to be the debate over corporate tax reform. Part of the foundation of this year’s rally was the expectation that a Republican White House and Congress would pass tangible reform. But with an increasingly antagonistic relationship between the President and lawmakers, its future is looking shakier, and if tax reform goes the way of repealing Obamacare, an S&P 500 breakdown would be longer-lasting and could point to a more meaningful trend reversal.
On an even shorter-term technical basis, we are seeing an uptrend line support come in at 2450, from late August and resistance at 2480 from a downtrend line resistance from the middle of October. This is a symmetrical triangle pattern, which occurs when you see rising support and declining resistance. While it's a sign that volatility has dropped, traders use this pattern to predict breakouts/breakdowns.
For example, a breakout above 2480 would be considered a breakout on the symmetrical triangle and indicate that the S&P 500 will break out above the 2490 level (resistance from the current range mentioned above). Similarly, a breakdown below 2450 from this symmetrical triangle pattern could be a sign that the S&P 500 will go down to 2420 and break that support levels as well.
The Bottom Line
From a technical point of view, the 2490 area should be viewed as strong resistance on the S&P 500, but should it break out from whatever catalyst, this would represent a meaningful breakout and continuation of the bullish trend. The 2420 area should be viewed as strong support on the S&P 500, but should it break down from any long-term impacting catalyst, this would represent a significant breakdown and a reversal of the bullish long term trend.
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