The last time I wrote about the US stock market I was expecting that the market would move lower based on the technical picture and the fact that the up volume statistics from the NYSE (New York Stock Exchange) were at levels that have led to either corrections or sideways moves in stocks. On December 1st I said: “The S&P 500 E-mini future (ES) created a narrow range candle last week. This implies no demand at those levels and increases probabilities of a sizeable correction.” After the publication of my analysis we first saw a rally back to the levels I referred to as no demand levels and then a correction of 4.05% on weekly closing basis.
Now the market participants are worried that plummeting commodity prices, such as Crude Oil and Copper are signalling slowing global demand. This makes investors wonder whether the current pricing of equities is in line with the expected global economic growth. Another issue troubling the minds of investors is the question on what will happen to interest rates. Currently the Fed funds futures are pricing in a 55% chance of first rate hike happening in July 2015. Rising rates have a tendency to slow the flow of money into the stock market.
S&P 500, Weekly
After trending steadily higher since 2011, the most important stock market index in the world is now showing signs of weariness. In other words, the increased volatility we have now seen might indicate that the immediate upside is somewhat limited and the market might move sideways and even correct lower over the coming weeks. I suggested this for the first time a month ago (12th November) when I pointed out some signs of underlying weaknesses. ES was then trading at 2021, 0.60% higher than the current bid. The market has now corrected to the general region of the pivot high from September this year and this has attracted some buying today. The major weekly support and resistance (S/R) levels are at 1906 and 2048.25 respectively. The 1906 support coincides with the weekly Bollinger Bands, a 50 week simple moving average and a Fibonacci retracement cluster. The next cluster of Fibonacci levels coincide with the pivot low from 1801 to 1818.
S&P 500, Daily
In the daily time frame the correction has moved ES to levels close to the daily 50 period moving average and below the lower Bollinger Bands. This has also taken the Stochastics Oscillator and Relative Strength Index to oversold levels. This market has not been able to stage a sustainable rally for five days, which suggests to me that the market could pretty soon try to rally higher. I called in my earlier analysis that this market should correct at least to the weekly pivot high at 2014.50 and now ES has moved below this level. We need to monitor both daily and 240 minute time frames in order to get clues on whether the market is ready to reverse the downside momentum. A daily close above the lower Bollinger Band (2 stdv.) would be a good start.
S&P 500, 240 min.
What we have in the 240 min chart is a clear downtrend. The immediate resistance levels coincide with the 23.6% and 38.2% Fibonacci retracement levels. The first one at 2009.50 is an intraday resistance level that has already had an impact on price as it approached it and the second is a daily low from 10th December at 2023.25. This level dwarfed a rally on 12th December providing a shorting opportunity to those familiar with my teachings in the latest webinar. On Wednesday the 10th we had an excellent audience attending a teaching session on ‘How to Use Multi Time Frame Analysis (Part I)’. Part II will take place in a couple of days time on Thursday 18th December at 8 am GMT. Seats are limited, so be quick to register and turn up early to secure your place!
In the longer term picture this market has signs of trend growing old (increased volatility) which usually indicates either sideways move or market topping before it moves lower. With the information available at the time of writing I am prone to go for the sideways option. We don’t yet have enough evidence of this market creating a top. In the daily time frame ES is oversold in terms of Stochastics and RSI, plus it currently is outside the lower Bollinger Bands. In the four hour chart we still have a downtrend which suggests that we might still have shorting opportunities available before the move gets too over extended and oversold and the market will reverse. The Fibonacci levels that coincide with the daily low from 12th and the intraday resistance level are worth monitoring as potential short entry levels. The daily and 240 min time frames should be the ones to give us clues as to when this current down move could reverse.
Disclaimer: Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of purchase or sale of any financial instrument.
Chief Market Analyst