The market has taken steps to continue the downside leg started off the April high. The break of the 1040 support last week gives the 950 support level an opportunity. The chart below shows the current downtrend in play and technically what is happenings short term. As you are aware, technical analysis is a strategy like any other, it forecasts a specific outcome based on statistical probability. It is not a definitive indicator and the risk of any investment based on this process should be taken into account. In other words, defined entry, stop and target on any investment is a priority in the planning process.
The chart shows the initial leg lower to 1110 in May on the electronic crash. The bounce didn’t hold and the next move lower was to support near 1060 resulting in a double bottom test of support near the 1040 level. The bounce back near 1120 failed and the current leg lower off the bounce is in play. Thus, the downtrend has been defined by lower highs and lower lows.
The downtrend off the April 23rd high is the primary trend to watch at this point. A bounce or relief rally could potentially move back towards the trend line as a test short term. What would be the catalyst? Earnings, if they are better than expected, we start reports next week and it could provide some short term relief to the selling. Watch the 1020 and 1000 levels for some short term support.
There is a head & shoulder pattern in play as well. The three white boxes show the left and right shoulder with the head as the peak in April. The shorter green horizontal line between 1040 and 870 is the height of the pattern and thus the target move for the break below 1040. The 870 level corresponds to one of the key support levels for the S&P 500 index as the low from last July. This pattern should be watched closely over the coming weeks. One thing is certain in technical analysis, the more people who recognize a pattern, the more likely is becomes a self-fulfilling prophecy.
Adding strength to the downside potential is the cross of the 50 day moving average (green) below the 200 day moving average (blue). This is known as the death cross in technical analysis and a clear indicator or confirmation of the downtrend in play.
Bottom line, there is plenty going on technically on this chart. They all add up to a negative trend in play, the second leg of the trend is in place with the move below 1040 and a target on the downside is 870. Thus, my conclusion would be to have a strategy in place to capture this downside opportunity as it plays out in the coming weeks or months.
Define the risk of any play and plan your entry, stop and target before you put money at risk in the market.