S&P 500 Bending, Not Breaking

Hugo Ste-Marie, Analyst, Scotia Capital

August 22, 2017

While the S&P 500 has not yet broken any major support levels, it is hard to sugar coat the weak price action since last week. It not only failed to rebound convincingly from its 2,438 low (August 10) hit in the aftermath of the North Korea–related tensions, but it also managed to close at 2,430, below that support zone, on August 17. From a tactical standpoint, the odds of testing the 2,400 level have increased. As we indicated recently, 2,400 is the key level to watch on the downside because (1) it represents a traditional support zone (horizontal line), (2) It is a big round number, which usually implies an important psychological level, and (3) 2,400 is where the 2016 rising trend line stands. A close below 2,400 could be an indication that a more pronounced pullback is in the making, with increasing odds of a re-test of the 200-day line (2,346). We’re not there yet.

While technicals have somewhat deteriorated, risk-off indicators have not been able to break out yet. The lower Chart of the Day highlights the VIX index. The volatility index spiked from around 10 in early August to 16 on August 10. The VIX tested again the 16-mark on Friday. However, the index has so far failed to accelerate beyond the highs of April and May 2017. In addition, the descending trend line in the chart continues to suggest to us that the downtrend in volatility is intact. On the other end, a close above 16 could signal that risk-off sentiment is taking hold.