What to watch out for next in the stock market

I look at SPX as it broke this red resistance line, which might later be retested, as investors and traders are thinking if the famous exchange-traded fund that tracks the performance of the S&P 500 index, will reach the lucrative round number 6000. Algos and traders might be ready close to there.

Itai Levitan

Thursday, 07/11/2024 | 15:30 GMT

Stock market analysis as SPX eyes 6000: Will the S&P 500 break through key resistance? 🚀

The S&P 500 (SPX) is on a steady climb, testing a critical resistance level around 5936. Traders and investors are abuzz, speculating whether this market heavyweight will reach the monumental 6000 mark—a round number packed with liquidity and significant institutional interest. Here’s what you need to know about this critical juncture!

SPX crossed up the red line resistance but might test it.

Current setup: testing resistance 📈

The SPX is nudging up against a rising resistance line with strong bullish momentum, currently hovering just below the 6000 level. Breaking this line would be a significant move for the index:

Above VWAP: The SPX has recently moved above the VWAP (Volume-Weighted Average Price) level of 5729.12, which suggests that buyers currently have control of the market. In technical analysis, trading above the VWAP is often a sign of strength, reflecting an ongoing preference for higher price levels.
Psychological resistance: Major round numbers like 6000 are more than just points on a chart; they hold psychological weight. When such levels are approached, they often act as liquidity magnets, drawing in both institutional and retail interest.

Experience insight:

In previous runs to major round numbers, like the approach to 4000 and 5000, the SPX saw a surge in volume and momentum-driven trades. Traders who recognized the significance of these levels were better positioned to capitalize on volatility or potential reversals.

Why 6000 matters: liquidity and psychology 💸

The 6000 level isn’t just a number; it represents a key psychological milestone with high liquidity potential:

Liquidity magnet: Round numbers tend to attract high liquidity, often triggering a flurry of buying interest. A move toward 6000 could bring in momentum traders, institutional investors, and even algorithmic trading, amplifying volatility.
High stakes for bulls and bears: If the SPX approaches 6000, it could trigger short squeezes or new long positions, adding to the buying pressure. However, if it struggles to clear this level, institutional rebalancing or profit-taking could lead to a reversal or a sharp pullback.

Expert commentary:

According to Morgan Stanley strategist Mike Wilson, defensive stocks remain the preferred choice for investors navigating the current market landscape. Wilson advises caution regarding small-cap stocks and other "cheap cyclicals" that have lagged in performance over recent years. He attributes this underperformance to an ongoing deceleration in growth, suggesting that these sectors may face continued challenges ahead..

Key levels to watch 👀

Monitoring specific price levels and indicators will provide crucial clues about whether the SPX can sustain this bullish run:

Volume and price action: As the SPX inches closer to resistance, watch for volume surges. High volume often confirms bullish momentum, while low volume could suggest hesitation and the risk of a reversal.
VWAP support at 5729.12: This VWAP level could serve as a support floor if there’s a pullback, indicating whether buyers remain committed. A hold above this level would likely maintain the bullish structure.
6000 as a major liquidity target: If the SPX breaks out above resistance, a swift rally toward 6000 may follow. However, it’s essential to be prepared for either scenario; this level could act as either a launchpad for further gains or a brick wall, setting the stage for profit-taking.

Trustworthiness through data:

This study reveals that informed traders exploit round-number biases, strategically buying at 9-ending prices and selling at 1-ending prices to capitalize on psychological triggers among liquidity traders. As the SPX nears the key 6000 level, this round-number threshold could attract similar trading behaviors, increasing volatility as both informed and retail investors react to this psychologically significant mark.

Bottom line: is SPX ready for lift-off? 🚀

The SPX is at a critical juncture, testing a resistance level that could lead to a significant breakout or a sharp pullback. I will also be looking at smallere timeframe price reactions in case of a potential bull trap just over 6000, or in other words, a potential failed breakout, as deep pocketed profitable longs may want to tak partial profit and see the news of Trump winning the elections. As SPX approaches 6000, the market will reveal whether the bullish momentum has staying power or if caution is creeping in. Traders should stay tuned, AND CONSIDER MITIGATING RISK BY TAKING PARTIAL PROFITS, in my humble opinion. See ForexLive.com for additional views.