S amp P 500 charts another equity market sell off imminent

In quieter days like today, it is not a bad habit to do some homework and study your long-term charts and see through the market noise in order to figure out the underlying trend. For the US stock markets, the best gauge is perhaps the S&P 500. Below we have both the daily and the weekly charts that we’d like to draw your attention to.

As can be seen from the weekly chart, the multi-year rally has evidently peaked this year around an exhaustion area of 2135/40, which corresponds with the 161.8% Fibonacci extension level of the entire 2007-2009 bear trend. After climbing to this area, the index has gone on to break outside of a strong long-term bullish channel, before dropping sharply in the middle of last month, followed by a period of stabilisation that has lasted for about a month now.

But when long-term bullish trends end, it is very common for the markets to stage strong counter-trend rallies that last several days to weeks, before a fresh wave of selling takes place. This is because most people will still be looking for trades that had worked well in the past: “buying the dips,” in the case of stocks. However, astute traders would use these counter-trend moves to reduce their long exposures and some would increase their short bets. As a result, this typically precedes another sharp leg lower before it becomes clear to most people that the trend has in fact changed.

Although at this stage it is still too early to say whether the markets have indeed peaked, the technical evidence in front of us suggests this may well be the case. And now that we have had a decent recovery, the probabilities of another leg lower have increased.

Last week saw the index momentarily break through the key 1995 resistance level. But the bulls were unable to hold their ground there for long because the rally quickly ran out of steam at the 61.8% Fibonacci retracement level of the move down from the record high, at 2021 (see the daily chart). The resulting sell-off created an inverted hammer candlestick on the weekly chart of the S&P, a technical pattern which points to further weakness – particularly if the low of this signal candle is breached decisively now.

The low from last week was around 1946, a level which incidentally also roughly corresponds with the 38.2% Fibonacci retracement of the most recent upswing. If this level breaks down, the sellers may then target the 61.8% retracement level of this move at 1905 at the very least. The 78.6% retracement level comes in at 1874, followed by the August low at just below 1835 and then the October low at 1820. These will be among the bearish targets in case we do see a move to the downside this week.

Meanwhile on the upside, the key resistance levels for the S&P are at 1980, followed by the above-mentioned resistance level of 1995 and the 61.8% Fibonacci retracement at 2021. If the latter breaks then the index may go on to test the next resistance at 2045 or even the 78.6% Fibonacci level at 2072, before deciding on its next move.