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S&P 500: Rally from Support Needed; Otherwise October Could Turn Ugly

S&P 500: Rally from Support Needed; Otherwise October Could Turn Ugly

What’s inside:

  • The S&P 500 breaks free from wedge, faces a big test of trend support
  • Price action in the Nasdaq 100 and Dow suggests key support could fail
  • A turn higher is needed very soon; otherwise October could turn ugly

From Monday’s commentary:“The S&P 500 is nearing a make or break point, given the period of congestion is narrowing towards an inflection point where something material is likely to happen. A break lower quickly brings the trend-line off the Feb 11 low into play.”

And that is where we are at after yesterday’s sell-off...

The trend-line off the Feb lows is under assault and needs to hold, now, if the market is to avoid beginning a meaningful leg lower. A sustained move below yesterday’s low at 2129 (just below the Feb 11 t-line) will bring into focus the 2120/19 level (6/8 peak, 9/12 low). A break below this key support will not only represent a clear break of the 7-month trend-line, but also a significant lower low. Beyond 2119 a sell-off could grow legs with nothing visible to the left in terms of price. We would need to look to the widely-watched 200-day moving average, currently at just below 2068, and a lower parallel dating back to earlier in the year as the next possible support levels. Prior to that, minor support may be found at a lower parallel running back about a month ago.

On the flip side, if the Feb 11 trend-line can hold on a daily closing basis, the first point of contention on the upside is at 2044/45. This is a spot the market held on four occasions over the past 2+ weeks. (Old support = new resistance.)

S&P 500: Daily

Created with Tradingview

In looking at the Nasdaq 100, yesterday it broke the June trend-line and in the process also closed below the three peaks carved out during late summer. The drop in the Dow put it firmly below the Feb 11 trend-line and not far away from the Sep 12 low at 17995. These developments suggest the S&P may not hold here.

Dow/Nasdaq 100: Daily

Created with Tradingview

Bottom line: A turn higher is needed right about now. If not, volatility could begin to swell and October could start living up to its nickname, “Shocktober”.

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---Written by Paul Robinson, Market Analyst

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You can follow Paul on Twitter at @PaulRobinonFX.

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