We’re closing out another strong month for the bulls. As of midday trading on Friday, the S&P 500 has risen about 3.4% in May.
While that seems lackluster compared to April when the index gained more than 12.5%, the bulls continue to build on momentum they have established from the March low.
This action has infuriated many investors, particularly those that puked up their holdings at or near the March lows expecting a deeper decline as the coronavirus forced shutdowns around the world. At the very least, many were looking for a retest of the lows, not a near-runaway rally to the upside.
That’s as more than 40 million Americans have applied for unemployment benefits since the pandemic began, bankruptcies continue to pile up and balance sheets are being put to the test.
The Federal Reserve has stepped up in a big way and so far - and as rates are so low everywhere else - investors have flooded into the stock market, bidding equities higher and higher. They’ve done so the past two months, but can the bulls push for a third month of gains?
Trading the S&P 500
Above is a daily chart with two blue boxes that highlight the trading range for the past two months. This view helps blend multiple trading ranges together so investors can see both the macro and micro view of the index.
As you can see, the index struggled with the 2,950 area, which came into play near the April highs at 2,955, as well as the 61.8% retracement near 2,935. Impressively, the S&P 500 pushed through this area and raced to the 3,000 mark and the 200-day moving average. After quickly reclaiming this area, it's now trying to hold it as support.
Purely from a price action stance — and news and economics aside — the S&P 500 looks great. April was an “inside month” and May will likely be the “up” month, giving investors an inside-and-up setup which could equate to more upside.
If that’s the case, look to see if the S&P 500 can clear May’s high up near 3,069. Above puts the 78.6% retracement in play near 3,136, followed by the large February gap up between 3,260 and 3,330 (purple box).
Given the economic situation though — and potential volatility looming with tensions increasing both domestically and abroad — a pullback isn’t out of the question.
In that scenario, there’s not enough cushion to rely on support at 3,000 and the 200-day moving average. Instead we return our interest to the 2,950 area, where the index finds the April highs, the 61.8% retracement, and currently, the 20-day moving average.
Below that puts a gap-fill down toward 2,860 in play, followed by the 50-day moving average and ~2,775. Near the latter, the S&P 500 finds the 50% retracement and the May low.