It's surprising the S&P 500 index managed to eke out a 0.8% gain from last Friday's close. Given the previous week's strong breach below the 50-Day SMA, it was always going to be a question of where the stock market would find support. This was a week that would mostly be dominated by the macro headlines with the Jackson Hole symposium. The technical picture is interesting:
Once the index dropped below the 50-Day SMA, market technicians look for potential support levels where the market will rebound. Once we got the rebound, technicians then look for upside resistance. It looks like we experienced the classic "change in polarity". This is the principle where a breach of support level (50-Day SMA) changes its nature and becomes the resistance level. You can see how the 50-Day SMA acted like a support level as the 200-Day SMA started to turn upwards. This is what we typically see in a strong short-term uptrend, any price retracement tends to rebound before it can meaningfully breach the 50-Day SMA. Now the index is below the 50-Day SMA , we see it act as resistance. The 50-Day SMA happens to coincide with a previous line of resistance so the convergence of indicators usually means greater numbers of traders are seeing the same thing, so you get greater numbers acting in unison.
Convergence is also what we saw at the support level. A previous trough represents the level where traders and investors stepped in to drive the market higher. It's usually a good indication it will be a future support level. The S&P 500 index happened to rebound just before we got to that level. If I zoom in and add the Fibonacci retracement lines, you can see the index rebound beautifully off the -23.8% retracement level. This is spooky stuff. I've mentioned several times before how the market seems to respect Fibonacci retracement levels. It's possible I'm "fooled by randomness", but the odds I would see it so many times during my tenure as an investor and it would only be due to randomness seems fantastical.
So where do we go from here? If you're short-term bullish, then we'll retest that 50-Day SMA to see if sufficient buying enthusiasm breaks through that resistance level to get us back in track. If you're short-term bearish, then we're going to retest that -23.6% Fibonacci support level. My TA mentor use to give me those two sentences and leave it at that. It used to annoy me, but now I understand why. Short-term market direction is basically unknowable, so traders have to prepare for either possibility. The idea is to have a bias towards a particular market direction, but be totally prepared for it to go the other way (so you can set trailing stops etc). I'm going to say my bias/inclination is for the S&P 500 index to head up given the market didn't panic after comments from "J Powell et al" at Jackson Hole. We saw an intraday move higher (price reaction) which I hope will at least carry forward to the beginning of next week.
Of course if you're a long-term investor whose dollar-cost averaging into your market index fund or your favourite long-term stocks, none of what I say should influence you in any way. Interpreting the visual language of the markets can be of interest, and useful for mentally preparing yourself for what's coming up, but your primary contract to yourself is to stay the course.