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Chart Of The Day: Technicals Confirm S&P 500 Is Now In A Downtrend

By Investing.com (Pinchas Cohen/Investing.com)Stock MarketsOct 01, 2020 09:42AM ET
www.investing.com/analysis/chart-of-the-day-its-confirmedthe-sp-500-is-now-in-a-downtrend-200539570
Chart Of The Day: Technicals Confirm S&P 500 Is Now In A Downtrend
By Investing.com (Pinchas Cohen/Investing.com)   |  Oct 01, 2020 09:42AM ET
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As September came to a close, the S&P 500 Index locked in a 4.7% loss for the month, its worst decline for the same period since 2015, when the index shed 5.1% of value. However, when the benchmark fell to its 3,209.45 low—exactly one week ago—it was down as much as 8.3%, on track then to provide the worst results since the 8.6% losses on September 2011.

An abrupt realization by investors that mega cap tech stocks were overvalued, triggering a comparison to the dotcom bubble, sent high-flying tech shares lower, weighing on the broader index. However, the very same technology companies that dragged benchmarks into a rout were suddenly bargains at their lower levels, which seemed to justify driving prices up again. Adding to the market pressure, on-again, off-again hopes of additional US pandemic economic relief, chances of which today appear once again optimistic.

However, while the S&P 500 did climb for the fourth day out of five yesterday, the widely-followed benchmark did close well off its high after Mnuchin said there had not yet been a final agreement hammered out.

Trader consensus, however, isn't projecting optimism this deal will actually come to fruition. Technicals projected by the price and its trading pattern indicate the index is heading lower.

SPX Daily
SPX Daily

As mentioned above, yesterday’s advance finished well off intraday highs. It did so after attempting to breach a rising flag, bearish after the 7% plunge in just three sessions from Sept. 3-8. Yesterday was the third day in which the price fell away from the bottom of this bearish pattern.

The 50 DMA joining the flag’s bottom underscores it's a technical pressure-point, where supply and demand meet. Wednesday’s trading pattern developed a shooting star, a candlestick with a long upper shadow, charting how bears drove bulls back, a bearish indicator.

Combined, all this increases the odds that the current rally is losing momentum. Market mechanics—a return move following a breakout, after the first explosive drop, as demand dried out within the continuation pattern—let supply crash when sellers raced to find new willing buyers, at lower prices. The return-move was presumably fueled by a short, along with short-term dip buyers, compounded by hopeful bulls.

Now that the move's technicals have been cleared out, the resistance on the very bottom of the flag suggests positions will continue to roll along the market dynamics, perhaps prematurely pricing-in the ever illusive stimulus package.

Trading Strategies – Short Position

Conservative traders would wait on a short, for another trough, establishing a downward peak-trough formation, independent of the prior uptrend.

Moderate traders may risk a short with a close below the present week's price cluster, which would indicate that demand has run out, letting supply crash lower.

Aggressive traders would short right now, after bulls failed yesterday to take on the flag, even after piercing it on an intraday basis, sending them into a retreat, providing they have a trading plan that they will follow. Here’s an example:

Trade Sample

  • Entry: 3,365
  • Stop-Loss: 3,400
  • Risk: 35 points
  • Target: 3,225
  • Reward: 140
  • Risk:Reward Ratio: 1:4
Chart Of The Day: Technicals Confirm S&P 500 Is Now In A Downtrend
 

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Chart Of The Day: Technicals Confirm S&P 500 Is Now In A Downtrend

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Comments (7)
Gordan Flego
Gordan Flego Oct 04, 2020 3:00AM ET
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Agreed. You can also draw a channel with support on bottoms. It looks like bullish flag, but I think that there is one leg down. There was no LH or double bottom to help SP to break up. Target around previous LL is reasonable
Eric Doll
Eric Doll Oct 01, 2020 12:43PM ET
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looks like another lower high. would need a big move up to reverse the daily downtrend. Bearish
Pinchas Cohen
Pinchas Cohen Oct 01, 2020 12:43PM ET
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Well, Eric, a lower high by definition needs a lower low. As of now, the price could still go higher. So, there is no lower high yet.
Jan Skilbrei
Jan Skilbrei Oct 01, 2020 12:33PM ET
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apologise , its Cohen, a good name
Pinchas Cohen
Pinchas Cohen Oct 01, 2020 12:33PM ET
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I don't mind if you spell it "Cohan," I only made the comment to Mikko Saarela to be annoying by completely missing his point.
Jan Skilbrei
Jan Skilbrei Oct 01, 2020 12:32PM ET
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thanks for the comment Cohan, its the stimulus 'hopes', it tested the 50% fib and the 200 4H ema confluence (also), its a 'third test', hence may break up more easily now.
Pinchas Cohen
Pinchas Cohen Oct 01, 2020 12:32PM ET
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Sure thing, Jan. Indeed, hopes, but as we've learned since the Mar bottom, hopes can drive markets for a while too, substantiated or not. I'm sorry but I only rely upon analytical methods I understand, and since I don't understand Fib, I don't rely on it.
Calvin Moore
Calvin Moore Oct 01, 2020 12:25PM ET
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S&P not in downtrend! Below 3216 maybe
Pinchas Cohen
Pinchas Cohen Oct 01, 2020 12:25PM ET
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It's in a short term downtrend after establishing two lower peaks and troughs, as I've marked on the chart. I don't understand why you attach significance to 3216.
Jan Skilbrei
Jan Skilbrei Oct 01, 2020 12:04PM ET
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Your flag is very subjective, alternatively; Sp has daily close inside a box, and now can trend higher, although of course its hard to imagine any retest of all time high, fibs more reliable for a short upon certain price action
Pinchas Cohen
Pinchas Cohen Oct 01, 2020 12:04PM ET
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Agreed. However, I drew the flag before yesterday's price action. You can see it in yesterday's post. The close below the flag bottom lends credence to my interpretation. While subjective, I didn't draw my flag willy nilly arbitrarily, but based on my experience. Monday's and Tuesday's resistance and the 50 DMA reveal where the technical pressure point is, and that is the whole point of the flag. Anyway, right now, it looks like it could be a blowout, as the price retests yesterday's shooting star on an intraday basis.
Mikko Saarela
Mikko Saarela Oct 01, 2020 11:11AM ET
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Cohan has no idea what he is talking about
Pinchas Cohen
Pinchas Cohen Oct 01, 2020 11:11AM ET
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It's Cohen.
Ganesh Kannan
hereformyshare Oct 01, 2020 11:11AM ET
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mikko, let's hear your analysis.
 
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