S&P 500 - Precarious Technical Posturing
- Two-day decline puts S&P 500 on support
- Next steps important ones in determining a change in market character
- One possible scenario: ‘head-and-shoulders’ formation should a lower high develop
Yesterday, we saw good follow-through to the down-side in the S&P 500 following rejection just short of critical daily resistance around 2080 and the top-side trend-line most easily visible on the hourly time-frame. The Dow fell back from its resistance zone between 17750 and 18000, while the Nasdaq 100 failed to hold above broken resistance around 4500 for more than a day.
Selling pressure pushed the S&P below a couple of degrees of trend support and brought the Friday swing low and a lower parallel into play on the hourly. So far this has acted as support, but on a couple of bounces into the broken trend-line extending back to March 10 sellers stepped in, further marking its importance as support now turned resistance. On the daily time-frame the market has moved up in pretty good form within a channel which began shortly after the thrust off the Feb 11 low. Yesterday’s decline clearly put it outside of this structure no matter how you draw it. Previously broken trend resistance off the October 2015 peak is providing some support around current levels, but not considered a major source.
S&P 500 Daily: Oct '15 - Present
The next steps the market takes will be important ones in the short-term as all pullbacks to date since the Feb 11 low have been either shallow and/or lasting only a couple of days. If buyers don’t step in here quickly then it will be the first sign of market participants showing a lack of ownership on weakness, and not only that, with the previously mentioned signs of the trend destabilizing it likely won't take much time for further selling pressure to ensue. As we noted yesterday, the fact the market has made two quick declines from swing highs in such close proximity to one another (3/30 & 4/4 peaks) is suggestive of a trend weakening. Where the S&P sits right now is the same price levels it was trading at over two weeks ago. Momentum is clearly faltering. This leads us to one possibility…
A scenario which could very well unfold in the next couple of days is the development of a ‘head-and-shoulders’ pattern. We have the ‘left shoulder’ set from the end of March and the ‘head’ coming from rejection off top-side resistance; what we need now for this path to play out is for a lower high to develop (could be in the process of doing so now) and a clean breach of ‘neck-line’ support around 2042/43. Again, it’s not in play until support (‘neck-line’) is broken. A counter-trend rally should not carry much higher than the ‘left shoulder’ around 2072 at the highest, or else the H&S potential quickly diminishes. Additionally, it is preferred we don't see a closing daily bar above yesterday's high of 2065.
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---Written by Paul Robinson, Market Analyst
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.