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What’s inside:

  • S&P 500 gaps to new highs then sells off, carves out bearish engulfing bar
  • This could mark the beginning of a small pullback or correction period
  • Support below in the vicinity of 2455/48, resistance at 2578

See the DailyFX Q4 Forecasts to find out what factors are expected to drive global equity markets into year-end.

On Friday, when we looked at the S&P 500 we described the market as being in ‘slow-motion melt-up’ mode, as the index continues to rise with very limited volatility. There was one minor hiccup on Thursday, but it didn’t even last past the morning session before the market was back at it rising to a new record close. One thing we have been watching for is price action which may indicate a change in direction may soon be upon us. Since earlier in the year we have seen surges to new highs rejected by sudden ‘meaningful’ down days and/or key-reversal bars.

Yesterday’s ‘gap-n-trap’ may qualify as the type of sudden change in momentum which marks the beginning of weakness. A minor correction at the least. It wasn’t an extremely powerful day but the gap above Friday’s high and close below its low does constitute a bearish engulfing bar. If we are to see a push lower then yesterday’s high at 2578 likely won't be exceeded, or at least not on a closing basis.

There is support not far below which will need to be broken first if downside momentum is to gain traction. The trend-line extending higher since June and off a swing-low in August have recently held together the grind higher. A break below thes lines of support along with 2548 will be required in order for a meaningful pullback to develop.

All-in-all, the trend has been persistently higher with little reason to be bearish, but we might have our first sign that a period of correction (at the least) could be about to get underway. This would set short-term traders up for some back-n-forth price action, something we haven’t seen in a while.

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S&P 500: Daily

S&P 500 Technical Analysis: Engulfing Bar Marking Start of Weakness?

---Written by Paul Robinson, Market Analyst

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