S&P 500 – Reversal Day Quickly Shifts Focus Lower

What’s inside:

• S&P 500 breaks out from triangle consolidation, fails
• Key reversal day on a breakout suggests near-term weakness
• First level of support comes in near 2350 where confluence lies

Find out in our Q3 Forecast what’s driving the S&P 500 this quarter.

Heading into yesterday, in the weekly indices/commodities webinar we were discussing the bullish consolidation in the S&P 500 and the likelihood that we see a rally towards new record levels. But then the pop higher (which came from a nice little triangle) turned into a key reversal day, a formation we are quick to point out when they happen given their often-telling sign of a stall in the trend at best, reversal in many cases. When these key reversal candles form following a breakout from a consolidation they can have even more meaning than usual.

Overseas markets are reacting to the situation brewing in North Korea, with the Nikkei shedding 1.29% and Europe all down around 1% at the time of this writing. S&P 500 futures are currently off by nearly 10 handles, or about 38 bps. This is setting up for follow-through on the reversal-day we saw yesterday. A fake-out breakout from the triangle formation as well. The combination of pattern failure surrounding the candlestick suggests lower prices to come.

The first area of good support arrives at the record high levels achieved in June at 2354, which is also in approximate confluence with the lower May parallel. How the market responds upon a test of this area near 2350 will be important should we see expected weakness. A break and we may be on the verge of seeing a deeper slide. But before we go sharpening our bear claws in hopes of a broader down-move (and higher volatility, a trader’s friend) we will want to first be vigilant with bearish positions around support if it is met.

S&P 500: Daily

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---Written by Paul Robinson, Market Analyst

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