Is S&P 500 Destined to Go the Same Way as Shanghai?

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Today, S&P 500 decreased more than 2 percent, in addition to all other broad market indexes. The bearish divergences in the MACD and ADX line for the previous few weeks already portended a similar move. It's merely the huge liquidity in the markets (cash on the sidelines) which delayed and made it harder to time the decrease. For the S&P 500, we reached the increasing channel lows with today's sell-off. Further explanation is that the "hanging man" formation may be divided into two day of trading, with a sell-off in the early morning and a rally in the middle of the day. This rally must follow through tomorrow...and that didn't happen with the open at the lower shadow. This left rally buyers in a predicament...if they should sell or hold their recently acquired positions. Because of the short-term natures of this market and the risk: levels of reward given where the index is, these buyers likely liquidated their positions creating some of the sell-off we witnessed today. The other blue circles in the chart show the other instances this "hanging" man and open at the lower shadow occurred. Now, the question is whether we'll hold support and obtain another bounce this time? Two times is great, anymore 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.

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. 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.

Article Source: http://depositarticles.com/

To obtain more market analysis and timing signs, go to www.MarketTimingSignals.com Carter Thompson

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