S&P 500 eyes pullback to 6,650 after strong rally

The S&P 500 Index (SPX) rallied throughout last week, turning around its previous slide. The price bounced more than 5% off November's lows but stalled out below 6,900. Sellers exhibited a more assertive posture as trading opened on Monday, threatening to print a bearish engulfing pattern on the daily chart. This could mean market players are cashing in on gains, and a pullback toward 6,650 may be on the way.

The odds of a dip are showing up in the Stochastic Indicator—both of its lines are now in overbought territory. The first floor sellers need to crack is 6,760. If that gives way, 6,650 will be the next target. Another test of 6,550 is in the offing, but every attempt to break below it this autumn has sparked a sharp rebound. The 100-day moving average is adding support there too, so a clean breakdown from there seems unlikely.

December is typically a good month for US stocks, but this year's Santa Claus rally might hit some snags. The chance of a Federal Reserve (Fed) rate cut on December 10 is now above 80%, so that's mostly baked into prices and won't be a fresh catalyst. In addition, excitement over big tech leaders has cooled off, with more people calling their shares overvalued.

For the first time in almost two months, money flowed out of US stock ETFs last week—over $4.5 billion worth, as Reuters noted. This suggests buyers are getting hesitant at these levels. With a big batch of economic data coming up and Fed officials in their pre-meeting quiet period, the market won't get any reassuring comments until after the decision next week.

The following strategy may become part of your trading:

Sell SPX at the current price. Take profit 1: 6,760. Take profit 2: 6,650. Stop loss: 6,880.