Travelling Technicals with Global Indices: The S&P 500

If there was one index that summed up market sentiment in the United States it's the S&P 500 that tracks the price movements of the largest stocks listed on the New York Stock Exchange and the NASDAQ with a broader representation of the overall equity market compared to its counterpart the Dow Jones Industrial Average.

Although it would be cumbersome to list every company featured in the index (as there are 500) its safe to assume that the most prominent blue chip co's are all represented in the index. The convenience of utilising an index this big is because of two distinct characteristics which are;

• Companies with large market capitalisation are more parallel in terms of their price movements to the economic cycle than smaller companies making the interest in them much higher than the latter. 

• The variety of sectors featured in the index gives investors a diversified choice when analysing the overall market giving a better indication of the sentiment in the entire market. 

Another stark contrast between the S&P 500 and the Dow Jones Industrial Average is the manner in which the weightings of the index are calculate with the S&P 500 being free-float market cap weighting and the Dow Jones price weighting granting more flexibility to the former when it comes to changing market dynamics and relevance.

Quarterly

The S&P 500 had been range bound for 15 years prior to breaking upwards and setting up a short spurt to the round figure of 2000. After reaching that level the price moved slightly higher before becoming unstuck at 2100 where its been oscillating between that resistance and support found at 1900 marking a 10% difference from the highs to the lows. 

At one stage during the last four quarters, the lows at 1900 were taken out and fresh lows were registered at 1800 that signalled the bottom of the short term pullback. 

Overlayed on top of the logarithmic price chart is a 13 SMA that's used in conjunction with the MACD to measure the strength of momentum that might remain from the upside break around 1600. The directionless motion the index has headed into allowed momentum traders to climb on board when the price fell below the moving average but the confirmation from the MACD is yet to give the green light. 

Two scenarios may come in the following quarters that'll define the direction of the index in the medium term. 

1. Price continues to hang about current levels until it finds enough momentum to finally break higher passed the previous all time highs translating into the continuation of the uptrend and onwards to higher records. 
2. Momentum buyers who took their chances underneath the 13 SMA get caught on the wrong side of the trade if the prevailing sentiment of a weak outlook remains. This will lead to the price dragging itself down back to the lows of 1800.  

Those traders are currently in the money but with no certainty when volatility could pick up they'd be compelled to tidy up their positions by profiting from the presumptuous trend that feels in jeopardy rather than it does steady. If 1800 were to give way expect a quick move materialise to 1600. An important note should be made that the figure on and below 1600 has been mentioned a few times by a number of large investment houses as a possible scenario of direction. 

Weekly

On the weekly we see the support above 1800 is neatly formed whereas the resistance towards the all time highs is difficult to trace in. This could possibly hint at nervousness of driving the price higher on a lack of fundamental evidence that points to a stronger US outlook. The 50 SMA is flat and has been so for an extended period of time pulling the sting from the tail of a potential upside rally. 

However the RSI does exhibit a feat of lying above the 50 level for a consistent period of time, a situation that hasn't been present for over a year as can be seen by the oscillation above and below with no degree of steadiness in a particular area. 

Indication could imply there might be a build up of momentum in the processes and we could see a surge higher but for now its more of a wait and see approach. There are still a number of outstanding technical points that need to be tested before we can feel certain over the direction of the index.