S&P 500 Highlights:

  • S&P 500 roaring higher, but signs of instability are starting to appear
  • Long-term chart showing we are in ‘blow-off’ stage
  • Shorter-term, operating from both sides of the tape presents challenges

For a longer-term fundamental and technical view on the S&P 500 and other major markets, see the DailyFX Q1 Forecasts.

S&P 500 starting to demonstrate signs of instability

To start the year, the S&P 500 is already up about 6%, indeed a large move in such a short period of time. Especially since it is coming at record highs, and not after coming out of a bottom following prolonged weakness. With the market accelerating upwards, daily ranges are beginning to expand, along with powerful intra-day down-moves starting to show up.

We saw a big intra-day move lower back on the 16th, and yesterday as well. The ‘gap-and-trap’ back on the 16th looked like it might lead to at least some downward follow-through, but buyers quickly snatched up the single-day bear market, and most of the nearly 40-point range was erased in a day’s time.

Long-term chart showing we are in ‘blow-off’ stage

Will we see yesterday’s volatile price action bring downside this time around? Given it appears we are in a ‘blow-off’ phase of the bull-market, it’s hard to bet against the market right now, and one day certainly doesn’t offer a lot of information. The market has gone off the rails beyond the top the of the bull-market channel, a signpost of a blow-off, but it could keep extending…

Chart 1 – S&P 500: Monthly

S&P 500 monthly price chart

The labeling in the above chart shows 5 clear waves in an Elliot-wave cycle, with the current leg ‘blowing off’ through the top of the bull market channel. Where wave 5 will end is hard to say, but it does appear we are quickly approaching a major turning point. (For more on the chart above, check out our top trading opportunities of 2018.)

Shorter-term, operating from both sides of the tape is challenging

From a short-term perspective, both sides of the tape are at a bit of a standstill at this juncture. The market doesn’t present appealing risk/reward from either side at the moment. Aggressive traders could use yesterday’s high as a backstop on shorts, but by employing such a strategy it has a ‘picking the top’ feel to it.

From the long-side, the prudent move may to demonstrate patience and wait for a dip/consolidation before entering into new longs. At least in this instance you would have a swing-low from which to assess risk should a larger decline develop.

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Chart 2 – S&P 500: Daily

S&P 500 daily price chart

Volatility is beginning to increase, with some sharp intermittent intra-day sell-offs. It suggest in the short-term that instability is growing and a decline of some magnitude could be nearing.

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---Written by Paul Robinson, Market Analyst

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