S&P 500 Index Exposed Downwards

On Monday the equity markets reversed course with the Dow, S&P 500 and Nasdaq down 1.5%, 1.5% and 1.4%, respectively, with one of the major drivers being the protests in China over the government’s Zero Covid policy. Then hawkish comments from multiple Fed officials led to continued weakness in the markets.

The markets have experienced strength since early October, which led to a slightly overbought condition recently. Mike O’Rourke from JonesTrading (no relation) wrote in his daily post-market email on Monday, “Coming into today’s session, the S&P 500 had rallied nearly 16% since its October low, and the move rivals the 19% rally from June through August, which the Federal Reserve felt it needed to quash. The equity rally had left the S&P 500 down 15.5% year to date and well off the lows of being down 24% year to date.”

Technically, the S&P 500 looks like it could rollover

After reaching its all-time high in early 2022, the S&P 500 has been in a downward trend. This is highlighted in a channel pattern of lower highs and lower lows as seen in the chart below.

Gaps also show potential downside risk

Carter Braxton Worth is founder of Worth Charting and frequent CNBC guest. He follows the markets as a technician and was the Chief Market Technician at Oppenheimer, Sterne Agee & Leach and Cornerstone Macro for almost 20 years before recently founding his own firm. In a series of charts he emailed this month they show gaps in the S&P 500 charts that could be filled.

The first is from November 18, which shoes a gap at 3,818.20. For this gap to be filled the Index would need to fall 3.8% from Monday’s close.

This chart from November 9 shows gaps to the upside and downside. Note that while the Index increased as shown with the red arrows and circles, it did not fill either of the upside gaps. The Index would now have to fall 14.5% and 16.0%, respectively, to fill the two downside gaps.

Momentum is positive but could quickly turn

Jim Cramer on CNBC sometimes highlights a chart from the Fibonacci Queen, Carolyn Boroden. She uses the 5-day (blue line) and 13-day (red line) exponential moving averages to show upward and downward trends in the markets. When the lines cross it tends to show that the market has bottomed or topped and could reverse direction. And as seen in the chart below these trends can last for a few weeks. Note that while this chart shows a discernable pattern, no chart is perfect for investing.

When the 5-day is above the 13-day the market is moving higher (as it is now) it tends to stay in that trend until the lines cross. Besides a few days in early November the chart has showed a positive trend since mid-October. However, if there are a few more days of negative performance in the markets, the lines will cross. This could spell trouble for the markets.

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