S&P 500 – Rare Oversold Reading, Search for Support Is On

What’s inside:

• The S&P 500 day-to-day ups and downs make trading more favorable for the nimble day-trader
• Market becoming very oversold in short-term
• A move towards trend-line support in conjunction with oversold could present a nice trade from the long-side

The see-saw price action in the S&P 500 the past three days – big down, big up, big down – is making for good quick-flip conditions for the day-trading crowd as volatility finally emerges after a dull end of summer, but isn’t presenting a compelling set-up for the swing trader just yet.

In Tuesday’s commentary we noted: “If the S&P starts to fade back towards yesterday’s low, we will want to pay attention to how it reacts to determine if it is a retest or likely to be another leg lower.”

If the market doesn’t get pep in its step very soon we look likely to head lower in the immediate future, with a full test of the Monday low at 2108 and then the Feb trend-line quickly comes into focus around the 2100 mark. (Note: Levels are CFD prices.)

Market very short-term oversold: The percentage of stocks in the S&P 500 trading above the 10-day moving average dove to just under 8% yesterday, about as low of a reading as you will see. This type of oversold reading has tended to lead to bounces in the short-term. Looking back over the past five years the %above has only gone below 8% on fourteen occasions, of which 13 times the S&P was trading higher five days later. Compelling. (It's only one metric, but many of the indicators used to measure extremes are highly correlated.)

S&P 500 Index w/%>10-day

Support close at hand coupled with oversold conditions is reason for discomfort (poor risk/reward) in looking to establish a short position with a longer time-frame outside of a day. But should we see trend-line support met with the above described conditions in place, then we will soon have the makings for a potentially solid trade from the long-side. It’s possible we have already found support at the 6/8 peak, but price action is still weak enough at this time it looks as though another leg lower could develop into the trend-line first before seeing a tradeable low.

Hone your skills as a technical trader and check out one of several free trading guides designed for traders of all levels of experience, as well as “Traits of Successful Traders”.

---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinonFX.

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