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The S&P 500 today was down over 2%, along with every other broad market index. The bearish divergences in both the ADX line and the MACD for the past few weeks had already portended a move like this. It’s just the massive liquidity in the markets (cash on the sidelines) that delayed and made it difficult to time this drop. For the S&P 500, we reached the rising channel lows with today’s sell-off.
But seeing the market open today at the lower shadow of the previous day’s “hanging man” candlestick, it was possible to foresee today’s big drop. To explain further, the “hanging man” formation can be separated into two trading days, with an early morning sell-off and a mid-day rally. This rally had to have a follow through the next day… which didn’t materialize with the open at the lower shadow.
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This left buyers of the rally in a conundrum… whether to sell or hold their recently bought positions. Given the short-term nature of this market and the risk:reward levels given where the index is, these buyers probably liquidated their positions providing to some of the sell-off we saw today. The other blue circles in the chart below show the other instances this “hanging man” and open at the lower shadow happened. The question is if we will hold support and get another bounce this time? Two times is good, three times is pushing it…
In fact, a similar scenario occurred with the Shanghai Composite Index (SSEC) before it fell more than 20%. In the image below, the red circle shows the initial “shock” or sign of weakness, before a squeeze rally that even brought the SSEC to a new high. This caught all the longs at the peak, before a “hanging man” candlestick and an open at the lower shadow ensued (blue circle), leading to the collapse. The S&P 500 has gone through the same process so far, with the initial “shock” being the three-day sell-off we had towards the end of the last week (red circle), a short-squeeze (window-dressing?) rally last Monday and then the “hanging man” and collapse today.
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There’s a good possibility that the S&P 500 doesn’t fall as deep as the SSEC did though, as the S&P 500 had a few good area patterns along the rally, which at least took out some reasonable supply on the way up. The SSEC didn’t have that type of controlled up move, thus the crash was sharp and fast. We may also have some volatility at the support levels of the channel low for the S&P 500.
We also have the 50-day moving average at the 1,020 level. The odds favor a break of this low eventually given the amount of bearish divergences existing. Clearly sentiment has changed. Other support levels stand at 995 and 980.
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If you have to go long, stick to trading issues which have reached range consolidation support levels and those that are pulling back from new highs. Holding periods should be tightened while position sizes should be brought down. A break of 1,020 could be a good level to instate some shorts.
For more market analysis and timing signals please visit my website: www.MarketTimingSignals.com
Carter Thompson
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This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our .
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