Chart Of The Day: S&P 500 Rally Running Out Of Steam

Chart Of The Day: S&P 500 Rally Running Out Of Steam  | Jan 10, 2019 10:01AM ET

On Christmas Eve the S&P 500 plunged, falling 2.7%, its worst performance for that date on record. Since then it's bounced back, for its biggest market rally post-Christmas, to close yesterday just a hair below 2,585.

The primary reason for the current jump is most likely a result of technical drivers in the form of a short squeeze, though fundamentals have now caught up to push prices yet higher. The rally that's helped boost the index in recent days has been driven by a weakening dollar, easing trade tensions, an outlook for a slower rate hike path and last Friday's solid NFP report.

After the benchmark's 15% slide in December, we predicted prices would bounce, likely via a final rally before an outright bear market set in. The S&P 500 has now pushed higher by as much as 10% from its December 24 bottom. Today, we’re increasing the outlook for the end of the upward correction, when the short-term trend may re-sync with the medium-term downward trend.

Asian markets might be showing the first signs of a slowing rally, as global stocks and US futures turned lower earlier this morning.

SPX Daily

The SPX is trading within a descending channel. Its rally hit a brick wall on the October and December lows, the former, where supply orders were waiting, overwhelming demand and pushing it back from the highs; the latter, more recent encounter, had enough supply close the price at those levels.

Above those levels, the 50 DMA marks another price level containing a pressure point in the supply-demand balance. Note: it just fell below the October-December triangular consolidation, where supply and demand entered a battle, with the bears the obvious victors as they trampled over bulls, creating the aforementioned 15% drop. The pattern forms a resistance, as traders set up orders and stop-losses according to recent market activities.

Above that is the channel top, protected by the 100 DMA, as it falls toward the 200 DMA—a confluence of resistances to the price. The 50 DMA already crossed below the 200 DMA in December, triggering the ominous Death Cross, as the medium trend turned lower.

The RSI also shows momentum winding down, as it nears the low 50s, a July-October support turned resistance since November.

Also note the small size of the bodies of the last three candles. Each additional candle is getting smaller, as the rally runs out of steam.

Trading Strategies – Short Position Setup

Conservative traders should wait for a full correction to the channel top, at around 2,650, per the current angle. Then, they’d wait for the short-term uptrend to end, with a descending series of peaks and troughs.

Moderate traders would wait for either a full correction to the channel top, but not necessarily wait for a short-term trend reversal. They may be satisfied with first signs of it, such as with a long, red candle following a green or small candle of either color.

Alternatively, they could enter a short anytime the near-term activity reverses with a descending series of peaks and troughs.

Aggressive traders may short after the first signs of a top, such as with at least one long, red candle engulfing a green or small candle of either color. Then, they could wait for bulls to retest bears, which may push prices closer to yesterday’s highs, to reduce exposure.

Trade Sample

  • Entry: 2,580
  • Stop-loss: 2,600
  • Risk: 20 points
  • Target: 2,500 – late December-early January consolidation support
  • Reward: 80
  • Risk-Reward Ratio: 1:4

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Emanuel Dabah
Emanuel Dabah

Looking to the day chart it can get you to diff conclusions …  ... (Read More)

Jan 11, 2019 08:25AM GMT· Reply
Chris Sundo
Chris Sundo

Seems like the 13th day is gonna cause another downer. Tomorrow is the 13th day including Dec 24th. Calculation of Time until the retest is going to be the next science project.  ... (Read More)

Jan 10, 2019 10:35PM GMT· Reply
Chris Sundo
Chris Sundo

It wouldn't be entirely derived from fantasy if the rising trendline from the 2nd October low could end up forming an exact parallel underneath the XMAS low for the much anticipated 'retest' after which we could be bouncing between that and 2700 for a while in true 'trader's market' fashion (just fantasizing ..). That rising trendline is very important because it was touched perfectly by the November low and then again via the 12.12.'18 low in 'Doctor Death' fashion and then pierced by following day's candle. As if the number 13 was such a lucky number. BIG PUN intended :)  ... (Read More)

Jan 10, 2019 10:22PM GMT· Reply
Chris Sundo
Chris Sundo

Quite an ingenious chart. Sure wish I had known about it before Dec 24th. What was the earliest date that you published it on your website to your subscribers? ==== On the daily chart $SPX ( the last candle of August and the third (daily) candle of Sept: initiate a line that tangents the 2nd low of October and the Dec 24th low. Plain awesome considering the 'easy money has been made' and I was buying ERX on Dec 24th and did not bet the farm on the techs, although my Xmas list got a little bit filled with AMZN filling in the gap at 1333.33, and as of a couple days ago I've been short and averaging down. ====== So if today was an exhaustion candle that appears as a bullish engulfing like we saw the first trading day of January, then that could *****new buyers into tomorrow's downer that could bounce off 2,500 (BIGG round numbers are magnetic).=====The rising trendline from the 2nd October low across the hallway to 2680 appears to foreshadow a stall out at 2700 after 2500.  ... (Read More)

Jan 10, 2019 10:03PM GMT· Reply
Wallance Ben
Wallance Ben

how can I sign up   ... (Read More)

Jan 10, 2019 04:10PM GMT· Reply
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