There has been a significant shift in the outlook for major indices in recent weeks. No longer are rallies being used as a chance to sell. Uptrends on the major Wall Street markets are now a month old and are progressing well. However, markets are beginning to look stretched. This leads to potential complications in the trading strategies. We look at potential scenarios.

  • With Treasury yields now ranging, this should support a more positive outlook for equities.
  • The medium-term outlook continues to improve. This means that we prefer long positions and buying into weakness.
  • The near-term momentum signals are stretched and this could lead to some near-term profit-taking.

Ranging yields support indices

The outlook on indices turned around just as US bond yields peaked. We can see this in the chart of S&P 500 futures versus the US 10-year real yield. There is a traditional negative correlation between the two. The average correlation over the past 12 months is c. -0.25.

Real yields peaked in mid-June, around the point at which US equity futures bottomed. It is also encouraging that Wall Street has not fallen over, despite a recent pick-up in yields. This shows a resilience forming.

We believe that yields have peaked and that it is likely that the 10year will now move between 2.50% and 3.50% in the months to come. Although a near-term downtrend has been broken, this is yet to weigh on the outlook for equities.

So if yields are no longer trending higher and are set to range sideways, this will be neutral to positive for equities. It helps to sustain the recovery.

A potential trading strategy for S&P 500 futures

We have seen Wall Street markets recover strongly in the past month. Moves through the resistance of the key lower highs of early June have changed the outlook. However, these bull recoveries have gone a long way already. They are looking technically overbought on a near-term outlook. Subsequently, building support for any near-term unwind will now be the next key development.

Looking at the S&P 500 futures (SP500ft), there was a breakout above 4200 and this is the basis of initial support. The daily RSI very rarely gets above 70 (the last time was November 2021). This may be stretched but it also shows how strong the trend is.

We would look to use near-term weakness to buy into the recovery trend. The uptrend is currently at 4175 today, in the middle of the breakout band of support between 4145/4200. We believe that a retreat to the uptrend is a buying opportunity. 

The 21-day moving average has often been a good near-term gauge for the market. It has just gone above the 4080 higher low. This is therefore seen as a gauge for any unwinding move. We look for the recovery to continue above the April resistance around 4300, for a move towards 4355/4500 resistance.

A potential trading strategy for NASDAQ 100 futures

We also see NASDAQ 100 futures (NAS100ft) as being overstretched near-term. Once more this leaves us looking for a better opportunity to buy.

The NASDAQ is trending higher, with the trend at 13150 today. So with the RSI hitting 70 again, this is around where a near-term unwind could be seen. Any retracement back towards the uptrend is where we start to look for long opportunities.

Once more, the 21-day moving average is a gauge and this is rising around the support of the key medium-term breakout at 12950. Even though this would break the uptrend, we still look for long positions back towards here. A move back under the support at 12700 begins to look less assured in the recovery.

Possible trading strategies for Dow futures

Dow futures (DJ30ft) are also in the uptrend recovery scenario. Once more though, the RSI is overstretched and at risk of a near-term unwind. We would look for buying opportunities around the uptrend at 33000. This is in the middle of the breakout support band between 32900/33430. 

A move above 34035 resistance would be the next step forward in recovery and breaking through this would re-open the April high around 34700. The recovery outlook would be seriously questioned below 32340.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.