Last Tuesday, October 1, we warned that a double top was setting up on the S&P 500 when the index was still above 2,960 (Forget 3,000 On The S&P 500). We indeed saw a couple days of stiff selling last week as the index touched a low of 2,855.
While we believe macro fundamentals should (and normally do) drive the movements in the equity indexes, currently the market is caught between two opposing forces. On one hand, bullish anticipations for a China trade deal are putting a floor on the S&P 500. We all know that trading algos will put out huge buy programs on news that a trade deal is being finalized. On the other hand, bearish realizations of economic slowing are putting a ceiling on the S&P 500 on rallies. Indeed, looking back over the past 20 months, it has been a really bad idea to buy equities with the S&P 500 within a couple percent of record highs.
As long as these two forces offset, technical trading will reign. And that is what we are seeing.
Monday’s session, while boring on the surface, actually provided more confirmation of the technical trading taking place in U.S. indexes.
We have been mentioning to our readers in WMA ESG Investments & Monitors that the 2,960 level on S&P 500 e-mini contract will be a key level to confirm that the double top is still playing out, and the 3,000 level on S&P 500 won’t be revisited this year. 2,960 is the Fibonacci 61.8% retracement of the move down on the index from September highs to last week’s lows.
An intraday chart of the S&P 500 e-mini (below) shows to what extent technical trading programs are running this market. As the S&P 500 was preparing to move down in the morning session, we suddenly got a quick move up to 2,960, just to “check the box”, stopping on a dime, before resuming the downward move that began in the morning.
Bottom line: In the absence of trade news, investors need to monitor technical levels on the major indexes before putting new money to work or taking profits/losses on current positions. Our call for a double top playing out remains intact as long as this 2,960 resistance level on the S&P 500 holds during this rebound.
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