The S&P 500 Index managed to end an extremely turbulent last week with a gain of more than 5% without lingering near 8-month lows. As of Monday morning, traders continue to support the recovery in the US stock market. However, it is about to face a major hurdle. Reaching the 5530 level, coupled with overbought signals, may lead to short-term profit taking and a downward pullback in the index. In this case, the bears will target the 5270 level.
The optimism of market participants is conditioned by new statements made by Donald Trump. The US president made an exception in his tariff policy for electronic goods. However, Trump emphasized that this measure is temporary, and these goods will be subject to separate import duties, which are not related to tariffs on specific countries. In this regard, positive investor sentiment can quickly evaporate.
Analysts of Citigroup urge traders not to hope for a quick return of prices to their winter highs. Bank representatives downgraded their assessment of American stocks from "overweight" to "neutral", and the target for S&P 500 — from 6500 to 5600 points. According to Citigroup, US GDP and domestic corporate earnings growth has less and less superiority over other nations, leading to liquidity outflows to Asian and European markets.
Bloomberg points to another sign of unsustainability in the current rally in US equities. The Volatility Index (VIX) remains near early April highs despite the S&P 500's shift to growth. The VIX is still 20 points above its annual average, which Jeremy Wine of Moo Point Capital Management says is a serious concern. Market participants remain cautious and are unwilling to reduce their hedges in anticipation of new shocks.
One of the Stochastic Indicator's lines has already entered the overbought zone, suggesting that the S&P 500 has limited recovery potential. After the downward reversal, the 5270 level will be the benchmark for sellers.
Consider the following trading strategy:
Sell S&P 500 near the level of 5530. Take profit — 5270. Stop Loss — 5720.
This content is for informational purposes only and is not intended to be investing advice.
