Last week, I showed you how to use a stock’s support and resistance levels to most effectively gauge your entry points.
As you’ll recall, support and resistance are boundaries on a chart between which a stock’s price action plays out.
Support acts like a floor for price, while resistance acts as a ceiling.
Well, you can apply the same techniques to major market indices, too.
Often, indices are even more responsive to support and resistance lines than stocks.
Today, we’re going to take a look at the S&P 500 Index, and why its most recent breakout may be the best buy signal for stocks we’ve seen all year.
The End of a Trend
As you may know, the S&P 500 marked its all-time high on May 21, 2015 at $2,134.28.
Since then, the large-cap index has made lower highs and, until February 11, has made lower lows, as well.
As you can see, the index’s lower closing highs between May and October formed a well-defined resistance line.
When the S&P 500 rallied in October – after last August’s infamous “flash crash” – it was unable to break this downtrend.
A few months later, when the Federal Reserve raised interest rates for the first time in almost a decade, the stocks gave up all of their gains, even briefly closing below the low of August 25, 2015.
The rally off the February 11, 2016 market bottom, however, is markedly different than last year’s failed strike.
And here’s why…
Resistance Is [Now] Futile
On April 18, the S&P 500 not only broke its 11-month downtrend with force, but the resistance has now become support.
This means that many new buyers will likely come into the market with the bullish strength to push stocks even higher.
Prolonged global weakness has slowed the Federal Reserve’s rate hike plans, causing the dollar to fall.
The softening of the dollar has, in turn, provided a boost to energy and materials stocks, as well as international earnings.
These fundamentals have translated into fuel for the bulls, ultimately driving stocks – and the S&P 500 – much higher.
Participation in this rally is also much stronger among S&P 500 stocks than the last one of its kind.
Stocks are rising across all 10 S&P 500 sectors.
More than two-thirds of index constituents are trading above their 200-day moving averages (DMA) – the most since last May when the S&P 500 peaked.
Market breadth is absolutely crucial to sustain rallies in the long term.
In fact, the only sectors not trading above their 50-DMAs are the defensive sectors: utilities, consumer staples, and telecoms.
When trade goes choppy and volatility increases, investors reach for these stock market havens. At the start of the year, investors did just that and drove each of them to set new 52-week highs.
But since the start of the most recent rally, these sectors have fallen the hardest – further emboldening the bulls to increase their long positions. And many of the bears who are shorting stocks have covered their losing speculative positions.
So, what’s the best way to play the new uptrend without getting shorted?
Trade the Trend Like a Pro
Don’t even think about buying the S&P 500 or an exchange-traded fund that tracks it.
Instead, take a look at S&P 500 value stocks.
S&P 500 growth stocks have outperformed during much of this bull market. This year, however, the S&P 500 Value Index is up 4.5% versus the growth index, which has declined 0.1%.
It’s no wonder, considering high valuations across much of the index – particularly in healthcare and tech stocks.
Many institutional traders have already cashed out their growth stock gains and are loading up on undervalued equities.
Bottom line: If you’ve been on the sidelines waiting to hop into stocks… now’s the time. Align yourself with the “smart” money, and take advantage of the S&P 500’s downtrend break by adding solid value to your portfolio.
On the hunt,