Futures Update: Deeper Correction Looms for S&P 500

The S&P 500 FUTURES (SP) has been in a multi-year uptrend ever since it recorded lows of 665.70 in March 2009 closer to the end of the financial meltdown. If you are one of those who rode this trend early on, you would have substantially grown your capital over time. Even with the recent correction, you likely believe that the market will resume its uptrend very soon just like it did before.

Nevertheless, this is not the time to be complacent. The recent SP bounce is looking like the dead-cat type. This gives us reasons to believe that there might be more pain ahead for investors. In this article, we show how there’s a deeper correction looming for the S&P 500 index and, by extension, its futures.

Bearish Short-Term

S&P 500 futures may have rejected lower prices when it bounced off lows of 2,371 on December 26, 2018. However, there’s very little about this bounce telling us that the market remains bullish. In fact, several technical indicators suggest that this is a relief rally rather than a true recovery.

Daily chart of SP

First, we can see the SP creating a V-shaped pattern. While a market can reverse using this pattern, it rarely happens. When it does, there’s always time given for accumulation at the bottom. This is something that we do not see in the market’s V-shaped structure. Without some form of accumulation to keep the move up sustainable, the market is at risk of giving up all of its gains.

Gold (XAU/USD) as sample of V-shaped reversal

Speaking of a solid base, the rally somehow materialized even with declining volume. This usually happens in an oversold market where sellers take a step back and allow the market to recover so they can short the bounce. We can see this possibility playing out in the S&P 500 futures as the market approaches resistance of 2,619.60.

With weak volume and fading bullish momentum, we expect the S&P 500 futures to resume their slide in the next few days.

Weak Long-term Technical Setups

The technical setups in the longer time frame affirm our assumption that more pain is ahead for this futures market. First and most importantly, there seems to be a divergence between volume and price. In a healthy bullish market, price goes up as volume increases. This makes sense as a growing demand in the form of increasing volume lifts prices.

On the other hand, a rising market with weakening volume is a red flag for most investors. It hints that the market is unhealthy and may be manipulated by an unknown entity. We’re seeing  this divergence in the S&P 500 futures.

Volume divergence on the monthly chart

On top of that, the 100 MA on the weekly chart is acting as a firm resistance. It is crawling closely to our immediate resistance of 2,619.60. In addition, the weekly RSI appears to face heavy resistance at 50. All these indicators suggest that bears are primed to take over the market.

Weekly chart of SP

Projected Move

With all these bearish signals in front of us, bulls must now do everything they can to take back resistance of 2,619.60 in order to dissipate the growing bearish sentiment. Failure to do so would mean that the market has flipped 2,619.60 support into a firm resistance (S/R flip). This would send a strong message that bears are flexing their muscles.

Should this happen, we expect SP to revisit lows of 2,317 where a technical bounce is likely to happen. However, this bounce will likely be weak and would not have the steam to go above 2,469. That S/R flip should be the final nail in SP’s coffin.

Projected SP price action

A break below 2,317 would ignite panic selling in the market. The next support below that level is 1,920. Interestingly, the 100 MA on the monthly chart is also crawling around that price area. This is the target for those who want to short the market once SP takes out support of 2,317.

Bottom Line

The S&P 500 futures may have recently bounced. However, all signs point to an even deeper correction. With bearish short-term and long-term setups, the market may be headed for more pain.


Featured image courtesy of Shutterstock.

Kiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and funds, as he does his own crypto research and is a Product Manager at Mitre Media. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.