S&P 500 futures have dropped recently from a high of 3,029.50 set on July 26, 2019 to a low of 2,913.50 on August 2, 2019, closing on the day at 2,932.50 (prices based on S&P 500 E-mini Futures contract, current-month contract).
Using TradingView.com charting tools with a volume profile tool, I survey S&P 500 futures prices below on a daily candlestick chart (the price range is set from 2,700 to 3,030, to capture the bulk of the recent trading range):
What this tool shows us is how thinly-traded or well-traded each level is. One important idea that volume profile analysis supports is that thinly-traded levels are targeted as possible areas for liquidity, and that price tends to gravitate towards areas of liquidity, volatility, and volume.
Although it is difficult to use this in isolation as directional bias is tough to glean from such analysis, we can use volume profile to indicate possible target areas for price independent of direction.
In the chart above, the red line and green line encompass the volume-weighted average price highs and lows of the range of prices that are most well-traded (in this case, around 2,705 to 2,890, roughly speaking). The darker dotted line indicates a Point of Control (POC) at about 2,750, i.e., the most well-traded level, and a developing POC at about 2,795.
Using pink lines and green squares, I have adapted the above chart to draw attention to levels of interest on the downside. These levels are: 2,907, 2,869, 2,848, and 2,835.
It is important to notice that price has rebounded from a low of 2,914.75 set on June 27, 2019 (which was incidentally a very bullish day, and as such that intra-day low was equal to that same day's opening price). This bounce more recently, on August 2, 2019, corresponds to a firm area based on volume profile (in the 2,915 region).
However, if price were to break this level of support at around 2,915, and fall under to approximately 2,912, my volume profile would suggest that 2,907 would almost be a foregone conclusion. And this would open up a strong potential to see the previously set VWAP price of about 2,883.80.
With 2,900 being a round level, it has psychological relevance to the market; therefore, in my opinion, a revisit to levels below 2,915 would greatly strengthen the likelihood of a retest of 2,900 due to both its relevance and proximity. A short break lower to the VWAP 2,883.80 would then be conceivable.
If the VWAP price were to fail to hold, significant downside could then be in store. I have identified levels of 2,869, 2,848 and 2,835, as these levels were relatively thinly-traded, and thus they could be tested with greater vigor, this time from above rather than from below.
Of course, it possible that S&P 500 continues to float upward in a business-as-usual manner. I hold the view that S&P 500 futures are very rarely worth shorting, as the overwhelming bias in neutral or bullish markets is for stocks to rise slowly. There is always demand for stocks somewhere in the world, even in crises, and with the influx of passive-investment vehicles like exchange-traded funds, business-as-usual typically returns after bursts of downside volatility.
However, could this time be different? Given price has already receded, next week and beyond would require risk-off sentiment to persist with greater strength. But this past week saw many important data releases and monetary policy updates (including the Bank of Japan on July 29 and July 30, the FOMC meeting on July 31, the Bank of England on August 1, in addition to lots of other important economic data releases).
Next week will be far softer from a data release standpoint, mainly from New Zealand and Australia (see here for an economic calendar). Much of the recent volatility has been accompanied by (finally) increased FX volatility among major currency pairs such as USD/JPY. This pair, an important gauge of risk-on/risk-off sentiment, has recently plunged from over 109 to under 107 (see daily candlestick chart below).
Other important currency pairs to gauge global risk sentiment are AUD/JPY and EUR/CHF. The chart below shows S&P 500 futures against all three of these pairs. (USD/JPY in green, AUD/JPY in red, and EUR/CHF in blue.)
As shown, these three pairs have actually been trailing down ever since the slide in stocks that occurred in May 2019. The lack of a robust recovery in FX markets has finally fed through into stocks. This will typically always happen, but timing is always tricky.
While I will cover FX in other articles, my overall view of many risk-on pairs is bearish at the moment. While my view is always subject to change, further yen strength is probably on the cards over the medium term. It is also important to remember that while a stronger USD may support USD/JPY, if both the U.S. dollar and the Japanese yen are increasing, the moves in USD/JPY can be misleading, as the USD can also be viewed as a safe haven.
A stronger USD and a stronger JPY, as we have seen recently (see chart below of the U.S. dollar index and JXY, a Japanese yen index) is one of the strongest signs of risk-off activity in FX markets. (JXY in green; DXY in blue.)
As you can see, the two indexes usually oppose each other as risk sentiment shifts over time. However, when they line up to the upside, you have a recipe for disaster among risk assets.
Could the recent disaster continue? If we see S&P 500 futures trade under 2,915, this could serve as a gateway to 2,900 and then 2,850 (with prices of between 2,835 and 2,850 being a reasonable area of support). The developing Point of Control of 2,800 could be met again, but the likelihood of this is low at this juncture.
Continue to watch the dollar and yen, as easing of these currencies - or at least of the yen - should be viewed as supportive. It is also worth noting that my volume profile additionally shows that the levels of 2,960 to 3,000 above have been relatively thinly traded. Retracements to the upside are therefore very possible, but unless 3,000 is broken, any short-term upside should be viewed with great skepticism.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.