The S&P 500 futures contract surged to a six-week high on Thursday, after China confirmed that stalled trade talks would resume in October, and is now trading about 50 points under July's all-time high at 3,028. Nasdaq 100 futures and big tech moved in lockstep with surging blue chips, lifting the contract within 160 points of the all-time high near 8,000. The underperforming Russell 2000 futures turned higher as well but remain stuck below massive overhead supply.

We've been down this road before despite the burst of euphoria, with trade tensions now dragging into their 20th month. Wall Street analysts remain highly skeptical about the chances for an actual trade deal, calling into question this week's rally gains. In addition, prior rally impulses have failed to end an ongoing exodus out of U.S. equities by Main Street America and many institutions – so what's different this time?

As we discovered in the third quarters of 2018 and 2019, major benchmarks can easily trade at new highs for a few weeks or months but still not attract the committed buying interest needed to sustain those lofty levels. From a mechanical perspective, computer algorithms that control price have a lot to gain by lifting above old highs or dropping through old lows because they generate volume and volatility that translates into windfall profits.

This activity has also carved megaphones, also known as broadening formations, in which nominal new highs generate shallow rising trendlines while steep declines hit new lows. This pattern has a bearish reputation because it builds a large supply of shareholders who get whipsawed by reversals, eventually giving up and hitting the sidelines. It's especially dangerous at potential tops in equities and indices, raising an alarm bell that is intensified by the S&P 500's assault on 3,000.

The blue-chip index took 11 years to test and complete a breakout above 1,000 that reached 2,000 in the fourth quarter of 2014. This event generated an immediate loss of momentum and complex correction that lasted for two years. The current uptick reached 3,000 just two months ago, and if past is prologue, it is unlikely to clear resistance in the next one or two years. And just to be clear, we really don't know if the index will trade below 2,000 or even 1,000 again.

SPY Weekly Chart (2016 – 2019)

Chart showing the share price performance of the The SPDR S&P 500 ETF (SPY)
TradingView.com

The SPDR S&P 500 ETF (SPY) surged off the deep 2016 low in an uptick that accelerated after the presidential election. It posted impressive gains into January 2018 and turned sharply lower after Presidential Trump turned his attention to Chinese trade policies. The fund mounted the high in August but attracted little buying interest, setting the stage for a fourth quarter failed breakout and deep dive to a 22-month low.

The same thing happened after the fund, index, and futures contract completed a cup and handle breakout above the August 2018 high in July 2019, with few committed buyers willing to open positions. August's failed breakout has done little technical damage so far, finding support at the 50-day exponential moving average (EMA). However, potential upside is now restricted to the upper megaphone line, which is crossing $305, or around 3,050 on the futures contract.

So the short answer is, yes, the S&P 500 and its derivatives can trade at new highs. However, that isn't meaningful because there's so little reward potential into major resistance. More importantly, the December low hasn't been tested, exposing the lower end of the megaphone now cutting through $220. Of course, the technical outlook would improve substantially with a high-volume breakout above the upper line, which is certainly possible if the superpowers end their bickering and cut a trade deal.

The Bottom Line

The S&P 500 is closing in on July's all-time high, but heavy resistance just above that level lowers the odds for a strong trend advance.

Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.