Over the past couple of weeks or so we have been writing about some key levels in the stock markets and some key things to be looking at when spread betting stocks, in particular the S&P 500. We have been writing about the importance of key long term support at 1034.8 on the S&P 500 September contract and how we expected that that level would be tested if support at 1070 failed.
We had written previously that the failure to push up above the resistance area around 1120 did not bode well for the short term since and the doji patterns that had formed at those levels confirmed upside resistance, indicated that the market was tired and changed the short term trend from up to neutral. It did not take much more from there to send the market lower towards short term support at 1070.
Yesterday the 1070 support level failed and this triggered a big down day for stocks and the S&P 500 fell all the way to the long term support level, briefly piercing support with a new contract low of 1030.5 before a slightly higher close at 1035.3, just above major support. This represented a decline of 3.32% for the day. This was also followed by major moves in the other stock indexes, which included failure for the Dow 30 at 10000 and the FTSE falling through 5000 and means that today is very likely an important day for the stock markets.
At the time of writing this, which is fairly early on Wednesday morning, the stock index futures are pushing marginally higher and it would not be too unusual to see a bounce higher in early trading after the size of the move yesterday. What happens during the rest of the day remains to be seen but the key thing to look for today for those of you who are spread betting stocks is a move back below support at 1030.5 and in particular a close below this level.
There will always be those traders who try to pick bottoms in markets and buy at support levels and we may see some of that today but although the market is pretty much dead on the major support level now there are currently no reversal signals, so trying to buy the bottom is a dangerous play. At LS Trader our approach is trend following, so we wait for support to fail and then use a momentum play to trade in the direction of the trend, which in this case will be down if support fails.
Should we get a move today back down below 1030.5 then the S&P 500 will likely be heading for the psychological round number of 1000 and below that down towards support around 965-970 and possibly further out towards 860, which would complete the previously mentioned head and shoulders top.
Let’s just recap the importance of the 1034.8 level that we have been writing about previously:
- A break of this support level would give new contract lows as well as being the lowest level seen on the S&P since November last year
- Our proprietary indicators at LS Trader would indicate that the long term trend has shifted to down should the market take out support here
- The previous sell off on 5th February found support at this level
- This is also the level of the lows of the “Flash crash” day on the 6th May
- Support from the lows of the hammer formed on the 5th February is also at this level and a close below this pattern negates the support from the hammer.
- This level also represents the neckline of a head and shoulders pattern that would give us a target of 860 to the downside.
- Our longer term view on the stock markets is bearish overall and we expect significantly lower prices in the stock markets later this year or at the very least at some point during the next 12 months.
- We are also on a seasonal basis moving in to the weakest time of the year, with September being the weakest month on average
Until next time, good trading and good luck with spread betting stocks