What Is The S&P500 Price Action Telling Us?
On Monday we discussed the action in the Small-cap Russell2000 and received a ton of great feedback. So I figured today would be the perfect time to go over what we're seeing in the Large-cap S&P500 Index. We are getting into the heart of what is historically the worst month of the year for the S&P500 as Barron's puts a Bull on the cover driving what appears to be some 
kind of ship with an angry bear that can't get inside. But we want put sentiment and seasonality to the side for a minute and focus strictly on what is currently taking place in the price.
*Note: For the purpose of this discussion we will focus on the short-term action in the S&P500 Index. Premium Members of Eagle Bay Solutions receive analysis each week on multiple time frames with additional variables than what is shown in this post.
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Here is a daily bar chart showing the S&P500 going on to make fresh all-time highs on what is historically one of the slowest weeks of the entire year. I generally take the action during the week before Labor Day and the week before New Years with added skepticism. Throughout my career I've see way too many failed moves during those weeks in particular to get all excited about the action. This makes me a bit uneasy about these new highs. We really want to see that former resistance hold, as you can see it here shaded in gray:
The overhead supply from July just above 1985 is the level we're watching. If prices break back below that, we would have a confirmed failed breakout. As long time readers know, from failed moves tend to come really fast ones in the opposite direction. So this support is incredibly important.
Moving on to momentum, as prices made new highs at the end of August, RSI failed to even reach overbought conditions, let alone make new highs itself. This bearish momentum divergence would also be confirmed if prices break back below 1985. Remember that a combination of a failed breakout with a bearish momentum divergence generally leads to moves that can last much longer than many market participants would expect. They are also typically very violent in nature.
On a brighter note, prices have not confirmed any of the above possibilities. Although I do think that a break of 1985 is the higher probability outcome, we pride ourselves on constantly keeping an open mind. So if this level does indeed hold, then the next upside target over the short-term would be near 2045. This level represents the 161.8% Fibonacci extension of the July/August correction.
If I were a tactical long here, I would put a stop below that 1985 and fade any strength over 2040. I'd initiate shorts on that 1985 break with a tight stop back above that level. The initial price target upon downside confirmation would be near 1905 which are last month's lows. But failed moves with momentum divergences can lead to much further declines than that. For now we'll stick with these levels and then reevaluate after we have more data.
I'll try my best to update this chart upon any important developments. But I think this is a good if/then road map for the time being. I hope this helps.
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