S&P 500: Bounces Likely to Be Short-lived

What’s inside:

• Sharp sell-off rivals declines in past year
• Overnight bounce in futures likely unsustainable
• Lower low below prior swing lows, looking for move towards 1940/50

Yesterday, selling pressure firmly carved out a lower low from the chop-fest created from March to recent. The plunge has been sharp, rivaling the decline seen to start the year and even more in line so far, in term of velocity, with the plunge last August when the world fell apart on fears over the slowing Chinese economy.

In early trade, futures are popping by a good amount, taking the S&P 500 back towards the 2020/25 vicinity where the May low pivot lies as well as a swing low created back in March. We will look for an initial reaction off a test of this area, but should no selling pressure appear, a larger rebound towards 2040 could be taking shape in the very short-term.

Sharp declines such as the one experienced since Friday rarely end after two days with the market immediately turning back higher and creating a new uptrend. Assuming the futures hold up into the cash session (13:30 GMT) we will have a sizable gap. For day-traders, these gap-ups against strong downward moves tend to offer good opportunities to fade for a decline towards the unchanged line at the least.

From a swing-trade viewpoint, the next notable level of support we are watching isn’t until around the ~1940/50 vicinity, which constitutes the breakout point of the double-bottom retest from February. Given the velocity of the recent down-turn a move towards those levels looks quite possible on this current leg lower.

SPX500 Daily

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---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX