The S&P 500 has frustrated traders for months as a tightening range punishes both bulls and bears.
Picking levels in a market like this can be a huge challenge because prices keep revisiting the same spots as they narrow. It’s a bit like trench warfare, with armies battling futilely for weeks over a few yards of territory.
But one basic technique has provided some clarity to help navigate the back-and-forth: Fibonacci retracements.
Notice how SPX surged from below 3500 on October 13 toward 4100 by early December. The rally stalled around the 200-day simple moving average (SMA). Sellers quickly returned, and for a while it looked the bears were in control again.
But then the index held 3800: a low from May 2022 and a “nice round number.” The level had other relevance because it represented almost exactly a 50 percent retracement of the preceding rally. (See the yellow markings.)
SPX sat for the next two weeks before returning to the 200-day SMA. The bears tried another attack, but couldn’t get prices to close under 3890.
This matched the December 21 high, but it was yet another 50 percent retracement. (Marked in white.)
Here are two potential lessons for traders:
First, retracements of current moves can be a simple way to find levels and manage risk. This is especially true when many price points and indicators compete for your attention.
Second, this kind of Fibonacci analysis may suggest the bulls are taking charge. After all, if prices rallied, retraced and continued higher two times in a row, it could be trying to tell us that a new uptrend is taking shape. Are we stair-stepping toward a breakout?
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It actually didn't hold the 50% on Wed, Dec 28th...It closed below it. It's only 1 day but it still counts as an inability to hold so your text "Holds the 50% retracement" is actually not entirely accurate. Even though it is only one day it presents a lack of bullish conviction during that consolidation period. In addition, a nice bear flag was created from Dec 21st to Jan 5th. Typically, when bear flags break to the upside a huge thrust occurs because traders are off sides however that did not occur. After the thrust and break to the upside of the bear flag on Jan 6th bullish momentum has not truly continued in earnest. Lots of bullish sentiment but charts are showing difficultly in clearing the hurdle.
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@Vixtine, add to that the volume comparison. The run from 3500 to 4100 had a large volume to it, which is not reflected in this bull squeeze from 3760, especially from 3800 upwards. I would say it's an attempt by institutions to level their exposure - the fall is coming. Another important level is 100 MA on weekly - it is a solid resistance; if we close above that at any point, bulls are on, but until then, it's a bear win.