sitox/Getty Images
- The stock market is staging a technical breakout that is bullish for equity prices into year-end.
- Stocks surged on Tuesday after the October CPI report showed inflation is cooling down.
- Here's where the S&P 500 goes from here after the bullish technical breakout.
The stock market is in the midst of a bullish technical breakout above key resistance levels, and it suggests more upside ahead.
Stocks surged on Tuesday after the October CPI report showed inflation is cooling down, sparking a sharp decline in interest rates and a 2% surge for the Nasdaq 100 and S&P 500.
Technical analyst Katie Stockton of Fairlead Strategies told clients on Tuesday that the S&P 500's strong gains over the past week signal that the closely watched index should gravitate higher in the coming weeks amid a period of bullish seasonality.
"The S&P 500 confirmed its breakout above minor resistance from the daily cloud model yesterday in a positive short-term technical catalyst. The breakout increases the likelihood of a test of more important resistance near 4,600 between now and year-end," Stockton said.
A surge to 4,600 for the S&P 500 would suggest further gains of nearly 3% from current levels, and would put the index just 5% below its record highs reached in January 2022.
Meanwhile, Bank of America technical analyst Stephen Suttmeier said for the S&P 500 to maintain its bullish direction into year-end, the index will need to hold support at around 4,343 if any sell-off materializes.
The technical bullishness isn't limited to the S&P 500. Suttmeier highlighted that the outperformance of the tech-heavy Nasdaq 100 suggests there could be considerable upside left in that index.
"The Nasdaq 100 broke above its downtrend line from late July. Holding above 15,000 keeps this upward break firmly in place with the potential to rally back to the July peak at 15,932 and to the late-2021 peaks near 16,600 to 16,765," he said in a Tuesday note.
That Nasdaq 100 traded at about 15,800 on Tuesday, putting the upside potential to its 2021 peak at about 6%.
Giving Suttmeier confidence in his bullish technical outlook is the fact that the 25-day put-to-call ratio has generated a contrarian bullish signal after a spike throughout October.
The put-to-call ratio measures how many bearish put options on the stock market are bought relative to bullish call options. When investors are buying more put options than call options, it signals a persistently bearish stance that some interpret as a market bottom with upside ahead.
The ratio jumped above the 1.0 level last month, suggesting the increased likelihood of a seasonal year-end rally for stocks.
Bank of America
"The 25-day put/call rose to a contrarian bullish level in October that aligns with the capitulation spikes that occurred near the S&P 500 lows from March 2023, December 2022, and October 2022. This supports the case for a seasonal low in the S&P 500 and is bullish," Suttmeier explained.
As to which indicator he is monitoring into year-end, it's breadth, or participation in the rally among different stocks.
In particular, Suttmeier pointed to the share of S&P 500 stocks above their 50-day moving average: "Holding 37% to 36% keeps this bullish breakout intact with plenty of room to run until overbought."
Bank of America