Friday's Market Minute: S&P Futures Flash Potential Trend Change Warnings

S&P 500 futures have seen three straight days of losses after topping out at 4,617.25 in terms of closing prices, and had fallen about -2% from that point as of yesterday’s close. Recent price action for the /ES recently is in the shape of a rising wedge, with a steeper trendline going across the lows from late June and early July and a more shallow trendline going across the highs from late July.

The three-day decline for the contract means price now sits near the lower edge of this pattern, and also resulted in price closing below its 21-day Exponential Moving Average. This commonly followed indicator typically is regarded as a potential source of support during uptrends, and can be used to assess general trend direction by watching its slope. It’s worth noting that the 21-EMA has shifted from trending upward to downward during this decline, which is an early warning sign for a potential trend change.

Other indicators also suggest the uptrend is faltering. The Relative Strength Index (RSI), which measures momentum of price, was showing bearish divergence in recent weeks, trending downward and slipping out of the overbought area as price made new closing highs. The RSI is now close to its midline of 50, which suggests weak directionality. Another style of momentum indicator called the Moving Average Convergence-Divergence (MACD) indicator showed a bearish crossover on July 27. Meanwhile, the Average Directional Index (ADX), which measures trend strength, has been falling from its peak on Aug. 1.

If price starts to break to the downside out of the rising wedge pattern, look for potential support near the old double-top highs from June around 4,490, and below that at the relative low close at 4,438 from July 7. However, if price regroups and starts to travel upward once again, resistance could be found first at the 21-day EMA and then around the 4,600 level based on the yearly +1 Standard Deviation Channel.

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