If you logged into the CNBC website on Thursday morning, you might have seen the headline, “Wells Fargo says don’t buy this rally, fundamentals don’t support it.“
Investors relying solely on fundamentals and not knowing how to read market technicals may be at a disadvantage when market analysts issue such warnings. It makes you wonder when they might finally give the green light if the market remains bullish.
Wells Fargo issued a similar warning back in November 2023. Whether analysts are right or wrong isn’t the point. The real point is that it’s important to have the right tools to anticipate a move, regardless of what fundamental analysts say.
Let’s look at a weekly chart of the S&P 500 index ($SPX).
The following are points to note about the above chart.
The warning. Note the week that Wells Fargo issued a “don’t buy this rally” warning (black arrow). The S&P 500 just broke above its last swing high at around 4,450.
The context. Look at the NYSE New Highs, NYSE New Lows, and NYSE New High/New Low ratio. The market was coming off a heavy wave of selling (blue circle in $NYLOW panel). Yet, on the week of the warning, note that new highs were ticking up (blue vertical rectangle).
The expectation. Bank analysts thought the S&P 500 might be stuck in a range between 4,100 and 4,600 (magenta rectangle in price chart), citing headwinds ahead. Indeed, there were two more technical headwinds in the form of resistance at 4,540 and 4,600.
The outcome. The S&P 500 kept going higher as soon as it broke above 4,600. So much for analyst expectations.
Nobody could have predicted what the S&P 500 was going to do. So, if you simply went long on a breakout of 4,450 and put a stop either below that level or, if you were willing to risk more, below 4,100, you would have seen the S&P 500 break above the resistance levels overhead as it soared to new heights. It was all about watching the key levels.
Let’s look at a daily chart.
Whether fundamentals do or do not support the S&P 500’s current rally, what you want to pay attention to are the following:
Wells Fargo may have said, “Don’t buy this rally,” but here’s the deal: if you can’t follow key technical levels, you risk missing out on key moves (whether the forecast was right or wrong). It happened before. Will it happen again? We don’t know, so watch those levels.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.