Stock Market Heading Into a Critical Test — What the Technicals Say

After approaching a key resistance level, the S&P 500 kicked off the week with two uninspired trading days. Stocks initially dipped in response to Moody’s downgrade, but retail traders quickly rushed in to buy the dip, eventually resulting in little net movement. However, a surprise bond auction on Wednesday rattled the market, causing the index to suffer its biggest loss in a month — and volatility ticked higher. From a technical standpoint, the market looks poised for its next big move. Still, investors are treading cautiously, as direction remains unclear and weakening sentiment could hint at more turbulence ahead.

Let’s first take a look at what the technicals are saying about the broader market.

The S&P 500 failed to break through Resistance Level 1 (around the psychological 6000 mark) after its recent rally, lacking any meaningful catalyst — like more trade deals — to push stocks further. While Moody’s downgrade of the U.S. sovereign rating last Friday was a clear negative, retail enthusiasm drove a record dip-buying spree on Monday and Tuesday, erasing most of the index’s early losses (roughly -1% at the open), and keeping the RSI above ~80 — indicating ongoing bullish sentiment.

However, despite that strong buying force, the S&P 500 closed nearly flat. This suggests that outside of retail mania, most investors are still playing it cautiously — and trading volume remains low.

Then came Wednesday’s curveball. Just as traders were gearing up to push the market higher again (as they had in the previous two dips), weaker-than-expected demand at a 20-year Treasury auction caused yields to spike — triggering concerns about government deficits and echoing Moody’s downgrade. The broader market couldn’t withstand the pressure and dropped, with trading volume jumping 23% compared to the prior two days.

So, is this a bull trap? Not quite — but we are heading into a critical test.

Specifically, Wednesday’s pullback pushed the 3-day moving average (MA(3)) downward, dipping slightly below the 7-day MA but still holding above the 10-day. Both the 7-day and 10-day MAs remain upward sloping, preserving the bullish order of MA(7) > MA(10). So, while it’s too early to draw firm conclusions, the setup suggests something big may be brewing — potentially a short-term reversal, or perhaps a healthy reset before the next leg higher.

If we see similar selling pressure in the coming days — especially without any meaningful bounce (or worse, a high open followed by a weak close) — the chart may turn decisively bearish. In that case, we could see a breakdown into a bearish structure: MA(3) < MA(7) < MA(10), with all trends pointing downward. Investors should closely monitor whether the S&P 500 breaks below Support Level 1, around 5780 — the gap-up rally level after the U.S. and China temporarily lifted punitive tariffs. A break below S1 would confirm a bearish pattern and could lead the index toward Support Level 2 or worse — further accelerating the selling pressure.

Remember: technical analysis often quantifies what fundamental shifts are already signaling. First, the bond market is flashing red over the fiscal impact of Trump’s proposed tariff-cut rollback plan, which could add $3.8 trillion to the national debt over the next 10 years and further undermine the credibility of U.S. Treasuries. Rising yields could easily weigh on equities—especially with the market still running a bit hot, fueled by retail euphoria.

But what if Trump fails to pass the tax cut bill? Investors might not cheer that either — as it would reflect poorly on his ability to deliver the corporate relief promised under the MAGA banner, and raise questions about his effectiveness going forward. So yes, we’re looking at a classic lose-lose scenario in the short term.

Secondly, the administration has been oddly quiet on the trade deal front — despite the President repeatedly claiming that “many deals are close.” Lack of concrete developments, or worse, a Trump-style retaliatory blame game toward foreign partners, could become the bearish catalyst that pushes stocks into the technical downtrend outlined above.

These are the key near-term uncertainties. In the medium-to-long term, failed U.S.-China talks, a Fed unwilling to cut rates, Trump’s sector-specific tariffs, and a hotter-than-expected CPI report could all become risk triggers — but those aren’t the immediate concerns.

On the flip side, trade optimism could be the life raft that rescues stocks from a technical bear. A wave of new trade agreements with allies like Japan or South Korea could flip sentiment. Like a double-edged sword, we’re in a news-driven market, and with Trump’s words having outsized impact on stocks, investors need more trade deals — or at least more executive action — as volatility looms once again.