Investors everywhere are watching the 2,800 level on the S&P 500 to see if the stock rally will fizzle there, or break through, signaling the potential for new highs.
Stocks have been flat so far this week, with the S&P 500 mostly trading around 2,800, a technical level it has been challenged by four times since October, including this week. The S&P did rise above 2,800 on Monday and Tuesday but failed to close above it. On Thursday, the S&P closed at 2,784, down 7 points. The last time the S&P closed above 2,800 was Nov. 8, but it hit that level on an intraday basis Dec. 3.
As the market has been testing the bottom of a 2,800 zone, it's also been faced with a heavy dose of headline risk from everything from China trade talks, the North Korea-U.S. summit, Fed testimony and a Congressional hearing featuring President Donald Trump's former attorney, who called him a cheat and a conman.
"People seem to be very focused on technicals and...this will be the fourth test of this resistance since the peak of the market at the end of September," said Dan Suzuki, portfolio strategist at Richard Bernstein Advisors. He said after reaching the high of 2,940, it initially fell to 2,728 in a matter of a few weeks.
"Every time the market has gotten to 2,800 or thereabouts, it's fallen and so it's failed there," he said. "It hit 2,800 in mid-October and then fell pretty significantly. It retested it in early November, fell again, retested almost at 2,800 in December, and that's when we saw the bid December correction, and now we're back to that level. There's a huge amount of focus on it."
Suzuki said the S&P level is even more important because so many traders have set computer programs with key technical levels in mind. "If we were to break out, there might be some further impact of those players to push the markets higher," he said.
Even though he monitors the technical levels, Suzuki makes calls on the market based on fundamentals, and he says on that basis it also makes sense for the market to be pausing at current levels.
"It's interesting because sentiment has been improving while the fundamentals have been weakening. Part of the improvement in sentiment is a reflection of just kind of correcting the collapse in sentiment that shouldn't have happened in December," he said. "We're now at pre-December levels, so from here to see another leg up in the market, it's got to be supported by improving growth outlooks, which we're not getting any concrete signs of."
Most of the data is supporting weaker growth, he added. "The combination of the technicals with the fundamental resistance makes this an interesting and significant resistance point for the market."
Frank Cappelleri, Instinet executive director and a technical analyst, looked back at the S&P 500 chart over a longer period, and found 11 times the S&P has tackled the 2,800 zone since the start of 2018.
"As we saw last summer, once 2,800 was officially overtaken, it became support," he said. "And that support helped propel the market to new highs."
Source: Instinet
The S&P 500 is up 18 percent from its Dec. 24 low closing, so Cappelleri said it makes sense that the market could pause to consolidate its gains.
"I would think because we've gotten here so quickly, and it's a recognizable number, and it's so quiet right now. There's probably a reluctance to get overly aggressive on the buy side, after the move, and there's an equal reluctance to sell. We're at a standstill," he said.
The current standstill could be a set up for a big move on the upside, according to some technicians.
"It is a barrier...just in speaking in terms of resistance, there's a range from 2,800 even up to 2,815. That would be the high from the October/November period," said Air Wald, a technical analyst at Oppenheimer. "It begs the question can we break through?"
He added, near-term the market could move sideways.
Wald said he is encouraged by some of the positives he's seeing, like a broadening in participation of different stock groups, evidenced in a growing number of advancing shares versus declining issues.
"Our recommendation for investors would be investing for a break out and a resumption of the up cycle," he said.
Suzuki expects stocks to eventually break out this year and move higher, but it could be choppy and may take some time.
"Clearly there are a lot of events out there, the next being an update on the trade discussions with China, as well as Brexit. It's important to look for some signs of stabilization of growth. I think one of the more likely areas where we could see stabilization is China," he said, adding its stimulus should begin to work and boost economic data.
In the meantime, headlines could make the market chop around. For instance, U.S. Trade Representative Robert Lighthizer emphasized in a Congressional hearing this week that there is still a lot of work to be done before an agreement with China can be reached.
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