"Resistance is a price point at which upward price movement is impeded by an overwhelming level of supply for the security that accumulates at a particular price level."
The market is set to bounce this morning as concerns about a trade war with China are easing and Novartis (NVS) announcing a deal to acquire AveXis (AVXS) in the biotechnology sector at a significant premium.
A bounce on Monday morning isn't a big surprise, especially after the dreary action Friday, but the question is whether the market can shake off the trade war worries and regain its technical footing.
The overall technical picture looks poor but one positive lately has been that the S&P 500 is holding at its 200-day simple moving average of 2593. There is quite a bit of technical overhead resistance in the near term up to 2675 and then all the way up to the 50-day simple moving average at 2710.
In recent years technical overhead has lost some of its meaning to the market as V-shaped bounces have become the norm. In theory there is a tendency for market players to sell stocks when they recover to a breakeven point. They are happy just to escape a stock that has caused them stress in the past. In addition, bears look for entry points around these key levels.
While the psychology of overhead isn't hard to understand, in recent years it has been undermined by computer action that seems to use these resistance levels in buy points rather than selling levels. This squeezes bears and causes underinvested bulls to chase and gives us surprisingly strong V-shaped moves.
Since the top in early January there has been a shift in this V-shaped action. We had one very good V-shaped bounce off the February lows but it stopped well before the indices returned to their highs. And a second try at the start of March made just a slightly higher high before it fell on trade-war worries. These two failed V-bounces have created more overhead and make it even tougher for a bounce to gain strong sustained momentum.
At this point we simply can't trust in the market's ability to deliver another V-shaped move. That doesn't mean that there won't be a bounce back to the 2700 level in the near term but we have to watch for that overhead resistance to kick-in.
The good news is that we do have some opportunity for some countertrend action right now. The biotechnology deal between Novartis and AveXis should help that sector, which has been under steady pressure recently.
Market players will also be watching FAANG stocks to see if they can shake off the Facebook (FB) flu and regain their status as a safe haven for big money. If that group can find some traction it will go a long way in returning this market to health.
President Xi of China is scheduled to give a speech on Tuesday at the Boao Forum in Asia. This is going to be of particular importance as it will indicate China's willingness to negotiate trade issues with the United States. Right now there is some optimism and market players are anxious for a bounce. Just don't count on V-shaped bounces this time.