S&P 500 Resistance and Support Levels

In the long-term price chart visual pattern recognition (“technical analysis”) doesn’t tell you much. In the short-term, it can often be a good guide when deciding when to make the next addition to a position.

Right now the S&P 500 chart suggests holding off on making additional investments in US large-cap stocks until the technical condition becomes Bullish – it is now unclear. It does not suggest reducing US equity exposure, but it does not suggest increasing US equity exposure either.

If you have a new slug of money to invest, or have a cash reserve position to invest, it may be prudent to do that when the technical indicators are more favorable.

Even if technical analysis is basically voodoo, like voodoo it works because people believe in it. If enough investors believe that certain current chart patterns precede and indicate certain near-term future price behavior, then they will act upon that belief, and the belief will be fulfilled – perception is reality.

“Support” and “Resistance” are among the more solid technical indicators. Double and Triple Tops are a commonly accepted indication of a price resistance level. Double and Triple Bottoms are a commonly accepted indication of a price support level.

Prices tend to bounce down from resistance and bounce up from support. When prices move above resistance or below support, they tend to move by a significant amount. That makes support and resistance useful for various kinds of short-term investment decisions, among which is deciding to make that next investment now, or to wait a little while for the price to decide whether to be bounded by the support and resistance, or to break free to continue a trend.

Two other common ways support and resistance are used are in selecting stop-loss exit points, and it selecting strike prices when buying or selling options.

Right now, today, I suggest deferring that next investment into the S&P 500 (or comparable fund) until the price stops playing with the current resistance level (the red dashed line at approximately 2800, formed by the triple top in 2018 shown by red down arrows).

If resistance proves durable (resists multiple attempts by the price to go above it), a material decline in the price of the index would normally be expected, at which point the support level (the dashed green line at approximately 2650, formed by the double bottom in 2018) would then move front and center. If the price does go above the resistance level and remains there for a few days, or moves strongly above the resistance level, a significant price increase would normally be expected. If the price does go below the support level and remains there for a few days, or moves below strongly, a significant price decrease would be expected.

2800 resistance and 2650 support are important lines of demarcation between Bullish and Bearish market views of the index.

The farther apart the failures (“tops”) are and the deeper the drop after, the more meaningful they are as resistance indicators. The two runs at resistance over the last few days are encouraging, because there was not a material decline between them, and the index came right back to try again.

A nice example of support and resistance in play at the bottom of the Bear market after the DotCom crash shows the strong upward price move after the price broke above a resistance level. The tops and bottoms that formed those resistance support levels were spaced apart in months and were at price levels more than 10% apart (both very meaningful). That triple bottom around 800 after a Bear market decline was strongly encouraging, and when the price moved above the resistance around 950, the index moved more than 20% higher over the next 6 months.

Support and resistance can be useful tools to help confirm changes in the direction of a trend.

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