1/ The S&P 500’s “Line in the Sand” at 5650
2/ Will Top Consumer Discretionary Names Follow Through?
3/ ULTA Testing Key Resistance Levels
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1/
The S&P 500’s “Line in the Sand” at 5650
On the last trading day in September, also the last trading day in Q3, the S&P 500 rallied into the close. This could certainly be attributed to normal end-of-the-quarter “window dressing” where fund managers tend to make changes to their portfolios in preparation for a quarterly snapshot of holdings.
One could also argue the late-day strength was driven by traders buying in on short-term weakness that emerged following Fed Chair Powell’s comments on potential further rate cuts in 2024. Taking a step back, how can we try and relate the short-term movements with longer-term trends for the S&P 500?
Courtesy of StockCharts.com
My general approach to trend-following is to define the trend and then determine a “line in the sand” that would tell me that the current trend is no longer in place. For the S&P 500 index, that process tells me to focus on the 5650 level as a key price point to watch in October.
If the S&P 500 is able to remain above 5650 in the coming weeks, that would imply that any short-term pullback is just noise, and not changing the general trajectory of the chart. I’ve also drawn a trendline using the August and September lows. As long as the S&P 500 remains above trendline support in the coming weeks, the uptrend would still appear alive and well.
2/
Will Top Consumer Discretionary Names Follow Through?
Consumer Discretionary stocks had a fairly strong September, edging out the Utilities sector as the top performer over the last month. What caused this resurgence in consumer names off their August lows?
Home improvement names like Home Depot (HD), as well as homebuilders and other related names, tend to benefit from the prospect of lower interest rates. When it’s cheaper to borrow, consumers tend to be more motivated to take on significant purchases like a new home.
Courtesy of StockCharts.com
The Consumer Discretionary Select Sector SPDR Fund (XLY) is a fairly top-heavy ETF, in that the top three holdings comprise about 45% of the ETF. So while HD breaking to new all-time highs in September was certainly a bullish development, I’m more concerned with the lack of breakout for Tesla Inc. (TSLA) and Amazon.com, Inc. (AMZN).
In bullish market phases, stocks don’t trade to resistance, they trade through resistance. So if we do see TSLA break above its July high around $270, and also witness AMZN powering above its July peak around $200, then that would confirm a bullish structure and imply further upside for the broader equity markets. But until those stocks can push to fresh new highs, the charts feel more like a “pair of twos” as opposed to a decent poker hand.
3/
ULTA Testing Key Resistance Levels
Ulta Beauty, Inc. (ULTA) is displaying a common technical configuration that legendary technical analyst Connie Brown would term a “confluence of resistance.” When we have multiple technical indicators all coalescing around the same level, that suggests added importance and greater significance.
After reaching down to around $320 in early August, ULTA gapped higher to the 50-day moving average, eventually retesting key resistance around the $410 level.
Courtesy of StockCharts.com
We can see on the chart that the September high lines up well with previous highs in May and July, and also sits below the 38.2% retracement level around $415. So while the push up to $410 represents an impressive recovery for ULTA, perhaps we’ve reached the pinnacle of this upswing phase?
If Ulta Beauty is able to push above $420, and then follow through to eclipse the 200-day moving average around $435, this would imply a much higher potential target. A retest of the March 2024 high around $575 may not be out of the question. But until ULTA can drive above the confluence of resistance, investors may be better served by being patient, and waiting for the chart to signal a new uptrend phase.
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Originally posted 1st October 2024
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