S&P 500 Challenges Major Resistance as RSI Nears Overbought Zone, Fed Looms

S&P 500 OUTLOOK:

• S&P 500 rises and defies an important resistance in the 4,315-4,325
• Meanwhile, the RSI indicator continues to approach overbought territory, a sign a pullback could be around the corner
• The Fed’s monetary policy announcement next week could be bearish for risk assets

Most Read: S&P 500 at 9-Months Highs as Bulls Assert Dominance but Downside Risks Build

The S&P 500 has rallied strongly in recent weeks, up nearly 6% since early April. Heading into the weekend, the equity benchmark was edging upwards and trading at multi-month highs, testing technical resistance in the 4,315-4,325 area, where the August 2022 peak aligns with the 61.8% Fibonacci retracement of last year’s decline.

While the underlying bias remains constructive, there are reasons to be vigilant. First off, the market appears stretched, with the Relative Strength Index approaching overbought conditions at the time of writing. The last few times this oscillator reached extreme overbought values near or above 70, prices dipped shortly thereafter. This is something to keep in mind going forward.

The other potential risk is the Fed’s policy outlook. While the FOMC has embraced a more cautious posture and signaled it could pause its tightening campaign this month, some traders remain skeptical of this plan, especially as other central banks, such as the Bank of Canada, are starting to get hawkish again in the face of persistently high inflation.

Related: Gold Price Latest – Support Continues to Build Ahead of a Pivotal Week

We’ll get a better picture of what the Fed is thinking next week when the institution announces its June decision and releases updated macroeconomic projections. Even if policymakers vote to keep borrowing costs on hold in their current range of 5.00% to 5.25%, they could signal a higher peak rate than forecast in the March dot plot.

Given the remarkable resilience of the U.S. economy, tight labor markets and sticky core inflation, the Fed could pencil in two additional 25 basis-points hikes for 2023 and rule out cuts for 2024. The scenario of higher-for-longer rates would be quite bearish for stocks because of its underlying implication: a possible hard landing down the road.

For all the previous reasons, the S&P 500 presents a poor risk-reward profile heading into next week. In fact, bearish setups look more attractive now, with the index overextended and probing a key technical ceiling near 4,315-4,325. In the event of a pullback, initial support rests at the psychological 4,200 level. On further weakness, the focus shifts to 4,140.

On the other hand, if the S&P 500 defies expectations and breaches overhead resistance at 4,315-4,325, the bearish tactical configuration would be invalidated, as this breakout could push prices toward 4,375, followed by 4,420.

S&P 500 TECHNICAL CHART

S&P 500 Chart Prepared Using TradingView