Stock markets are still trading near the highs despite some recent moves lower and the general trajectory is being supported by fundamental factors that describe strength in the broader economy. From a policy standpoint, there is still little reason to believe that the Federal Reserve will be raising interest rates in a meaningful fashion any time soon. The initial expectation that 2015 would be the year of rising rates has proven to be false, and it makes sense to start positioning for an extended period of easy monetary policy. These are forces that will support the ability for consumers to continue spending at elevated levels and this encourages the prospects for earnings growth in S&P 500 companies.
Supporting this outlook is the broad trend in durable goods orders, as this ultimately suggests that consumers are still able to buy automobiles and larger appliances in most households. Since these are not small purchases, we can use this information as an argument for higher prices in assets tied to the S&P 500 going forward. “Our data show that consumer trends in automobile purchases are steadily increasing over the longer term,” said Michael Davis, industry analyst at Mexican Car Insurance.“This activity is likely to improve prospects for the bottom line in many companies if these trends continue.” With this in mind, it is a good idea to have a sense of where the critical support and resistance levels lie in the assets that are tied to the S&P 500. Here we will look at recent chart activity in the SPDR S&P 500 Trust ETF (SPY, Financial), which is one of the most commonly watched trading instruments that are tied to the U.S. benchmark.
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SPDR S&P 500 Trust ETF (NYSE: SPY)
Critical Resistance: 212
Critical Support: 204
Trading Stance: Look to Buy on Dips
S&P 500 / SPY - Stock Trading Strategy: A modest rally in the S&P 500 has been in place since the beginning of March, and we are now coming into important resistance levels at 212 in SPY. A break here suggests the rally is still in place and buying dips is the preferred strategy.
The broad uptrend in SPY has maintained a steady pace since the beginning of March and while we have seen a few short-term retracements the larger momentum still favors the topside. We are now coming into the historical highs from February and we will need to see break here (rather than a failure) in order to confirm that this outlook is still valid. If this does not occur, it is likely that many longs will start to throw in the towel and we could see a deeper pullback. If this occurs, look for support at 204 to hold prices with stop losses likely to be found below. If we do see a clear break of 212, traders will likely start to look at psychological levels as the next resistance targets to be used for profit taking at higher levels.
