Article / 13 October 2016 at 12:36 GMT

Is S&P 500 about to break bearish?

Technical Analyst / Saxo Bank
  • Tuesday session sees S&P 500 break bearish out of long-term triangle
  • Technical indicators strongly indicate top, possible reversal forming
  • Move above 2,170 needed to shift out of bearish pattern

Wall Street
What's next for Wall Street? Photo: iStock 

By Kim Cramer Larsson

On October 11 the benchmark S&P 500 index broke bearish out of a symmetrical triangle pattern it has been forming since September.  It was not, however, a major surprise to see it do so as the index has seen resistance at the 55-day simple moving average and RSI has been unable to break back above 60 after dipping below 40 on September, an indicator of bearish sentiment. 

Despite a degree of rebound, the RSI has not been able to break above the falling trendline.

S&P500 daily
Source: Saxo Bank

The bearish breakout resulted in the RSI breaking its rising trendline and the index heading for a test of the longer-term rising trendline (thicker blue line) going back to Q1 of this year. 

That trendline is actually the lower trendline in a rising wedge that is better visible on the weekly chart...

S&P500 weekly
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Source: Saxo Bank

The highest peak in the wedge shows a Doji Evening-like pattern in September that usually indicates a top and a reversal. The RSI has moved in what appears to be bearish break out of a triangle formation.

A close below the index's Q3 low at around 2,119 would confirm a bearish trend on the weekly chart and take the index down to at least 2,000. There could, however, be further downside risk if support at around 2,000 is broken.

There will be some support in the fact that the 55- and 200-week SMAs are rising. Another factor on the positive side is that there has been no divergence on RSI at the peak (although volume has been falling slightly for the past two quarters). 

The monthly chart has been showing RSI divergence for the longest period now since the 1990s. The 2007 peak prior to the financial crisis, notably, didn't show this much divergence. 

The Index itself has posted Doji candles in August and September with October currently set to be bearish. If October does not end on a positive note, we have a Doji Evening pattern irrespective of having had two Dojis over the preceding months.

A Doji Evening pattern is a strong indication of a top; volume has been falling over the course of the entire eight-year bull market.  

The MACD indicator also shows massive divergence. The indicator has come nowhere near the levels recorded in 2014 and 2015 when the index posted its previous peak. During that time, it should be noted, the MACD indicator was posting highs not seen since the 1990s.

Will we then see a bear market of the type that followed the 1990s bull market? That is still too early to call, but there are definitely some warning signs on the chart signalling that we could see some volatility and a correction, especially if we get a Doji Evening formation for October.  

A close below September's low at around 2,119 could be the next trigger after the triangle breakout a couple of days ago. Looking at the futures prior to today's open, that level seem to be coming under pressure. 

For the not-so-bullish picture to be demolished and a new bullish move towards previous highs to come into play, a close above 2,170 is needed – as a minimum. 

S&P500 monthly
Source: Saxo Bank
Erik Doom Erik Doom
Thank you for good info 👍


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