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SPX Technical Analysis: Is This It?

SPX Technical Analysis: Is This It?

James Stanley, Contributor

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Talking Points:

  • S&P 500 Technical Strategy: Short, three targets hit, two targets remain
  • Stocks do not like 2016 so far; the S&P is already off by more than 7% in the young new year.
  • Conditional short-side setups exist, but traders would likely want to wait for attractive entries before triggering. Don’t let your FOMO (fear of missing out) obviate your risk management.
  • Markets are really volatile right now; risk management is paramount. Read our TOST research to improve risk management.

In our last article, we looked at the S&P 500 as support was being tested at the psychological level of 2,000. As we had mentioned in that article, support in this region has given multiple bounces, so traders needed to expect chop. But the ‘big picture’ setup that I discussed in my trade of the year as well as the Q1 forecast for DailyFX posited that a top may have been in place at 2,137. And with the Fed finally raising rates (and for some reason sticking to their opinion that we’ll see a full four rate hikes in 2016), this provided enough motive to setup that big picture short position.

To look at that potential top, we’re going to recruit a Fibonacci setup from the Financial Collapse so that we can get an extension. A clean 1.618 extension of the Financial Collapse move plots-in right at 2,138.54 – not even 1.5 handles away from the top put in the S&P in May of 2015.

Created with Marketscope/Trading Station II; prepared by James Stanley

This, in and of itself, is a horrible prognostication for a top or bottom. This is simply theoretical that something may, in fact, develop. But the lower-highs that came in throughout the second-half of 2015 combined with the pain seen on charts in August and September highlights the potential pain-threshold of stock investors. Namely, investors are scared, and while those fears may have receded in September and October as the Fed continued talking up easy money, well, things have changed. Rates have already moved up. The Fed is sticking to this expectation for four rate hikes in 2016 while much of the rest of the world teeters on the precipice of disaster.

This is why we wanted to look at a conditional setup in the last article rather than just going short and ‘hoping.’ Hope is a horrible trading strategy. Moving forward, traders will likely want to continue doing the same, approaching the S&P 500 (and other stock markets) with a conditional setup that will allow you to sell if and only if some element of resistance shows. When moves like what we’ve seen last week materialize, many investor and traders will often abandon their better senses for fear of missing a move. Don’t do that. It often costs way too much. Risk management is a necessity at all points. If you want to learn more, check out our Traits of Successful Traders research at this link.

On the topic of Fibonacci – that extension of the move from back in 07 isn’t the only exciting thing that the S&P has going on. If we draw a Fibonacci retracement from that 2,137.10 top to the lows set on China’s Black Monday on August 24th, we’ll get a set of levels that have seen significant price action since this move’s formation. This set the targets and entry levels in that last article, and this could be key moving forward. Traders can use these prices to institute a conditional setup on the S&P. The pertinent levels for current price action are at 1905 (the 23.6% retracement of that most recent major move), and 1949 (the 38.2% retracement). Price at these levels are not enough for an entry, as traders would also want to couple this up with an indication that sellers may actually be reacting to these levels. This can be done by waiting for an extended top-side wick on the hourly or 4-hour chart. This would also have the built-in luxury of simplified stop placement: Simply wait for resistance to show through one of these levels, and then look to get short after the completion of that candle with stop nested above the high. That way, if a ‘higher-high’ comes in the S&P, you can bail in the effort of mitigating the damage. But if we do get continued weakness without a higher-high, you get to manage a winner in a bleeding market.

On the profit target side, we will no longer have the luxury of being able to use Fibonacci levels from this most recent major move once 1905 is violated. We can look to prior levels of significance at 1,850 (psychological level + 8/26 low), and then 1,833 (8/24 low); but for more extended targets, we’re going to have to add a Fibonacci extension to the under-side of that most recent major move. This can give us long-term targets should new lows develop in the S&P. I realize, expecting a 10%+ move might sound outlandish, but so is stocks losing 7.6% in a week (last week), or 8.7% from the 12/30 high. We had discussed this in the article, the S&P is flat for the year, and that usually leads to big moves. Since 1980 there have been seven instances of the S&P putting in a ‘flat’ year, as defined by movement of less than +/- 6%. The average move in the following year has been 24.63%.

A 24.63% move from this years S&P opening price of 2,057.9 is 506.84; which would put prices at 1,551,04 – so targets as low as 1,645 are certainly not out of the question as risks continue to materializ in the global economy, and investors respond with continued and further risk-aversion.

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.