S&P 500: Preparing for Breakout, Week of September 3 (Technical Analysis)

Not even Nvidia’s ( NVDA ) earnings could spur a quiet week for the S&P 500 ( SPY ), which continues to trade just below its all-time high of 5,669. Even so, the biggest weekly and monthly closes were still done and it looks like a breakout is setting in as september begins.

But what kind of eruption will we have? A manual, clean move higher only happens part of the time, and there are many ways the S&P500 could behave as it makes a new high; some optimistic, some bearish and some just plain confused.

Of course, I don’t know in advance what will happen, but there should be hints about the different outcomes as things develop. This week’s article will outline what to look for and what to expect for September. Different techniques will be applied at several time intervals in a top-down process that also takes into account the main market factors. The goal is to provide an actionable guide with directional bias, important levels and expectations for future price action.

S&P 500 monthly

August ended at large monthly range highs and just 21 points from the all-time high. A bullish bar has clearly formed, although the “hammer” pattern usually forms near the lows of a large move rather than near the highs. The last time a similar bar formed was in October 2014, which is appropriate given the comparison made in last week’s article.

Seasonality in September remains on the weak side, and this is especially true in election years, which close higher only 50% of the time and have an average loss of -0.46%. Not the best environment for a sustained breakout.

The 5669 top remains the obvious resistance point. The next major target for new highs is the 6124 level. This is a measured move, where the 2022-2024 rally will be equal in size to the 2020-2022 rally. It’s unlikely to be touched this part of the election, but it’s a possible destination at some point in this bull market. In the short term, the 5879 level is a more interesting target as it fits the expectations for this stage of the rally as outlined last week. This can be seen in the log chart above and is the 161.8% Fibonacci extension of the 2022 bear market.

5390 and August low of 5119 are initial supports.

The August bar completed the Demark depletion number. It may have already had a near 10% correction, but its effect could linger and limit the pre-election rallies. The next sell-out signal will take at least 9 months to form.

S&P 500 weekly

The S&P500 took a much-needed rest this week, and a higher high, a higher low, and a higher close formed, making this a bullish bar. As concluded last week, “some loss of momentum could be expected and a consolidation in the 5550-5669 range would be healthy.” The close near the highs suggests this phase could end and a breakout could occur early next week.

5669 is the only resistance. 6010 is the 161.8* Fibonacci extension of the July-August decline.

5550 is the initial support. Not much compelling weekly support below 5324-5358. The 20-week MA will rise to around 5400 next week.

Next week will be bar 4 (out of a possible 9) in a new Demark depletion issue.

S&P 500 daily

The recent rally and consolidation has formed a classic “bull flag” and Friday’s higher volume advance suggests it is on the way up. Here are some pointers on how this might play out:

• a clean, manual breakout would play out with a high volume bar breaking above 5669 (ideally opening higher) and then closing higher. Closing higher again in the next session should cement the breakout.
• a less emphatic breakout would play out with a drift through 5669. There may be closes above 5669 and then a close back below, but the key is to hold higher lows with 5560 and ideally 5581. This is my expected scenario and could lead to a persistent slow move higher in the first half of September.
• a strong break above 5669 which then reverses and closes below 5651 could be bearish. However, it would need to continue with a decline below 5550 and even 5500 to really turn the chart negative.
• there are many traders who follow the 5669 level and make unflinching reactions to every move. Therefore, price action can be messy and it is better to react to inflection points such as 5500 rather than jump to conclusions on minor fluctuations such as daily closes above/below 5669.

5550-5560 is the initial support. The gap from 5500 is more important, with the 20dma and 50dma rising in the same area. The 5390-400 area is still relevant, but a return to this area would reflect a weak trend and delay the expected breakout, probably until after the election.

Unsettled conditions mean no Demark exhaustion signals have advanced and no new signals can be completed next week.

Drivers/Events

While the broader market reaction to NVDA’s earnings was positive, the loss of this leading stock may limit the S&P500’s gains and is another reason to believe that any breakout will not be very strong. The NVDA chart remains bullish, but the loss of momentum suggests that either more consolidation is needed or, at best, a larger slow drift will unfold.

Next week’s main event will be Friday’s Jobs Report. This is an extremely important release given last month’s weakness and subsequent backlash. It is also key whether the Fed cuts by 25bps or 50bps at the September FOMC meeting. Given its significance, large directional trades are unlikely before the release, and this could once again dampen any breakout attempts in the S&P500 earlier in the week.

The jobs report is expected to show the unemployment rate falling back to 4.2% and +164,000 jobs added. This would be a sign of stabilization and a market positive. Anything significantly worse should have a negative effect, but it would mean the Fed would then cut 50 bps instead of 25 bps, and I don’t expect a similar reaction in early August. Context is key here – the last jobs report came weeks into a correction with the S&P500 down nearly -4% already; sentiment / positioning were already bearish and a background was formed in the following session. The scenario now is almost the opposite.

ISM PMIs are due out on Tuesday and Thursday and are likely to be overshadowed by the Jobs Report.

Likely moves next week(s).

The overall picture remains bullish and a break to new all-time highs is expected. However, the context suggests that this may not be a clean and strong eruption. With NVDA no longer leading the rally and Friday’s NFP looming, action around 5669 could be erratic. Moreover, September is traditionally the weakest month and a strong and sustained trend before the election seems unlikely.

It could be a case of two steps forward, one step back in the coming weeks and I don’t think this is a time to read too much into the individual session price action. Rather, the bottom line is that there is a good chance that the S&P500 will continue to rise through at least the first half of September to above 5800. Only a weekly close below 5500 would shift the chart to the downside at 5390-400 and likely delay any breakout. out until after the election.