S&P's kick-back rally stalls at key technical level

As the new trading week begins, the markets are giving back some of the gains made at the end of last week. There are no major economic data to provide further fresh stimulus, which together with technical selling are scaring away some of the bulls. At the time of this writing, both the European markets and US stock index futures are at their lowest levels on session. Had it not been for a decent earnings season so far, the markets would have likely been much lower. All eyes are on Apple tonight and although the recently announced products such as the iPhone Plus are not factored into their results, a good set of numbers could nonetheless provide some support to tech stocks and possibly the wider market as well. But until Apple’s results are out, there’s not much to look forward to, so speculators are likely to focus more on the technical side of things than fundamentals.

A quick look at the S&P 500 charts unfortunately suggests more losses could be on the way, because the key 1900 level, which had been support in the past, is now holding firm as resistance. Unless the bulls manage to recapture this level, the path of least resistance would remain to the downside. As such, a move down to support at 1876, 1850 or even last week’s low of 1820 could be on the cards in the coming few days. A potential break below the 1820 level would be a particularly bearish development and we could then see the onset of another major leg lower. Worryingly, the fact that the S&P has only managed to pull back to the shallow 38.2% Fibonacci level (at 1897) suggests the market is still positioned short and that the next leg lower could potentially be quite significant. Meanwhile a decisive break above 1900 could spark a rally towards the 200-day average at 1908 in the short term and 1945 – the 61.8% Fibonacci retracement level – in the slightly longer term.