What: US bulls were tested on Monday after the S&P 500 threatened to break below the 100-day moving average at 2417, a key support level. Although the index managed to stay above this level, it didn’t bounce off this support signalling that the market may be getting fatigued with the slow grind higher in US blue chip indices.
There have also been some worrying trends in the lead indicators for the US blue chips including:
- The Russell 2000 index - a small cap index that is sensitive to US domestic policy and Trump’s (so far) failed tax reform agenda – has fallen through its 200-day sma, a key sign that the bears are in control. According to John Murphy’s Technical Analysis theory, the Russell 2000 is a key leading indicator for the US blue chip indices.
- The Dow Jones Transportation Average, also a lead indicator according to Murphy’s Technical Analysis theory, has also fallen through a number of key supports including the 200-day moving average and the bottom of the daily Ichimoku cloud. These are bearish indicators.
- The tech giants have led the rally higher in US blue chip indices so far this year, yet some of the FAANGS have failed to recover after peaking in late July including Amazon and Netflix. We believe that any decline in the major US indices will be led lower by the tech sector, so it is important to watch what the FAANGS do next.
How: It hasn’t been profitable to be bearish on the US indices for most of this year, and we would urge caution before running headlong into a short position, especially with volatility remaining at relatively low levels. However, a “hawkish” Yellen at this weekend’s Jackson Hole conference could be enough to tip investor sentiment over the edge and we may see a sustained period of decline for the S&P 500, although the downside may be protected from the good Q2 corporate earnings season.
From a technical perspective, a break and daily close below the 100-day sma at 2417 could trigger further losses, potentially back to the 2350 – the low from May that also corresponds with the 200-day sma, which we expect to act as a key level of support.