Thursday's Market Minute: Darkening Skies For Equities

Major U.S. stock indices dropped sharply this week, with S&P 500 futures yesterday down as much as 4.4% since recent all-time highs. Friday’s upside breakout followed through into the contract’s Sunday opening, but quickly transitioned into a hard downward move as of Monday’s cash open. The /ES broke through support at the low end of the past month’s trading range near 4115 on a hefty -2.1% red candle that closed only a point off the low of the day. Additionally, Tuesday and Wednesday both showed volume spikes more than 50% above volume’s 50-day Simple Moving Average, and high volume on big price moves typically suggests greater conviction amongst traders.

Technical indicators seem increasingly bearish. Price fell below the 21-day Exponential Moving Average this week, while momentum indicators like RSI have fallen off a cliff. Other bearish signals include: the Parabolic SAR shifting into a downtrend; yesterday’s close below the Bollinger Band study’s lower level; and the 21-day EMA itself turning downward. Also, the Volume Profile study shows very little trading has occurred from here to about 3960, so it’s worth considering whether traders will step in at these thinly traded price levels if things start turning south.

Despite the worsening larger-scale technical picture, the /ES is now near two important potential sources of support, which are the 50-day SMA near 4053 and the Linear Regression 50% Channel Lower Line near 4031. Be on the lookout for a retest of previous support near 4115 and the 21-day EMA near 4135.

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