There have been few stock market advances as powerful as the run from the January/February double-bottom. And the jump from what appeared to be a head-and-shoulders breakdown is impressive as well.
Even if the S&P 500 fails to make a new high, it now has significant support at the 2,040 line. A pullback to that line could be a good buying opportunity as long as the index does not close below the line.
It is hard to know how long the S&P 500 will be stuck in the narrow trading range at 2,040-2,058.
As noted in Tuesday's Daily Market Outlook, stocks have been able to withstand many "fears." And on Wednesday, fear of an impending rate hike should have been enough to drive the S&P 500 through its low at 2,034 and stick there. Instead, a cavalry charge of buying swept prices to an unchanged close — a strong signal that the bulls are holding.
However, cash is still king until Mr. Market clearly breaks out one way or the other.
The breakdown in the retail sector is a very negative development. Retail sales account for about 70% of GDP, so even one very negative day can have an impact on the broader market.
Regular readers know that I caution against predicting a pattern's development, especially one with a big market impact like a head-and-shoulders top, before all of its elements are in place. However, it appears this formation is developing on the S&P 500 with the index just over 6 points away from a breakdown at 2,040.
If the pattern's target of 1,969 is hit, we could see a test of the January/February lows at about 1,810
The market is telling us to be cautious.
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