Key SPX / ES1! Levels and Reasons for Bearish Bias Near Term
Updated
The downtrend in the S&P 500 continued last week. Charts of ES1! and SPX both show a downtrend line serving as strong resistance since the January 4, 2022 peak in this major index.
Key Moving Averages as Resistance
The chart above shows ES1! daily price action for the past several months. Recently, the price has been unable to move above the daily 21 EMA. Price has been met with strong resistance at the 21 EMA, and has closed below it since February 10, 2022. On March 3, 2022, price broke briefly above the 21 EMA, but this break failed the same day. On March 11, 2022, Thursday last week, price briefly touched the 21 EMA on what seemed to have been a momentary positive headline in the Russia-Ukraine conflict, but price again failed and fell lower immediately thereafter.
The key moving averages are all sloped downward, supporting the conclusion that the downtrend is intact and likely to continue. These moving averages are bearishly stacked as well. Even the 8 EMA (daily) has been acting as resistance, showing strong downside momentum.
On weekly charts (not shown), these key moving averages are also sloping downward with price extended well below them. Given how extended price is to the downside on the weekly charts, a mere reversion to the weekly mean could result in price bouncing violently to approximately 4400-4432 (the weekly 34 EMA and 21 EMA). So even downside positions are somewhat precarious at this point given the possibility of a weekly mean reversion.
Fibonacci Analysis
Fibonacci analysis supports more downside, but levels should be watched for invalidation of the downside thesis. Using Fibonacci analysis, draw retracement lines from the low on February 24, 2022, to the high on March 3, 2022. The .618 retracement equals 4222.75—the February 24 to March 3 rally retraced downward to this level and broke through it. The first time it was violated, price recovered, rising back above it, and the .50 and .382 retracements as well, and then price failed shortly afterward, falling back below all three retracement levels.
Notice on the futures chart above that ES1 made a weak attempt to break and hold above this .618 retracement level this Sunday evening, March 13, 2022. But after a briefly breaking above it, it fell back below it. This .618 will be an important level to watch this week. If it holds as resistance, further downside is expected near term.
Next, consider the following chart of ES1, showing the retracement levels for the recent decline March 3-8, 2022. Drawn from the high to the low of this decline, the .618 retracement is at 4311.75. Price retraced from the low of this decline back to this .618 level at 4311.75, and then reversed. So 4311 has served as an important resistance level. And because price could not retrace above the .618 retracement of its most recent decline, this supports more downside potential in the near term.
In considering very short-term time frames, the 30-minute chart below shows the rally from March 8-11, 2022 (late last week). The key retracements have been drawn on this chart as well. This evening, price seems to be breaking through the .618 retracement of this most recent 3.5 day bounce. This .618 retracement is at 4210.75. Last Friday, price broke through it at the end of the session, a bearish signal, but then this evening, price broke back above it briefly before failing a second time. This second failure to hold the .618 retracement of last week's rally suggest bearish action this coming week.
Other Technical Evidence
Other technical evidence supports the bearish case near term, as well as perhaps intermediate term (though sharp bounces should be expected). the downtrend line shown on the ES1! chart has been held since the all-time high in early January 2022. Stochastics supports a strong downtrend on both daily and weekly charts. Notice how %D is curving back downward after a weak bounce that could not even recover the 30 level.
ADX remains elevated at 37.14, with -DI holding above +DI.
And AO (the lowest positioned indicator on the chart above) reveals continuing momentum to the downside, as shown by red bars increasing to the downside below zero.
EFI is the indicator just above the lowest positioned indicator on the chart above. It shows a below zero reading with the recent bounce not recovering above zero, indicating that bears remain firmly in control—note the bullish divergence, however, with higher lows even though price made lower lows. It will be interesting to see whether this divergence remains intact in the week or two to come.
Overall, the bearish thesis remains. But caution is warranted as discussed above. Bear-market rallies can be violent and catastrophic for those entering short positions heavily when the market remains extended to the downside.
Summary of Key Levels
The key S&P 500 levels below use the SPY (the SPDR S&P 500 ETF Trust), as that is the security used as a trading vehicle by many who trade S&P 500 stock and options.
Key Moving Averages as Resistance
The chart above shows ES1! daily price action for the past several months. Recently, the price has been unable to move above the daily 21 EMA. Price has been met with strong resistance at the 21 EMA, and has closed below it since February 10, 2022. On March 3, 2022, price broke briefly above the 21 EMA, but this break failed the same day. On March 11, 2022, Thursday last week, price briefly touched the 21 EMA on what seemed to have been a momentary positive headline in the Russia-Ukraine conflict, but price again failed and fell lower immediately thereafter.
The key moving averages are all sloped downward, supporting the conclusion that the downtrend is intact and likely to continue. These moving averages are bearishly stacked as well. Even the 8 EMA (daily) has been acting as resistance, showing strong downside momentum.
On weekly charts (not shown), these key moving averages are also sloping downward with price extended well below them. Given how extended price is to the downside on the weekly charts, a mere reversion to the weekly mean could result in price bouncing violently to approximately 4400-4432 (the weekly 34 EMA and 21 EMA). So even downside positions are somewhat precarious at this point given the possibility of a weekly mean reversion.
Fibonacci Analysis
Fibonacci analysis supports more downside, but levels should be watched for invalidation of the downside thesis. Using Fibonacci analysis, draw retracement lines from the low on February 24, 2022, to the high on March 3, 2022. The .618 retracement equals 4222.75—the February 24 to March 3 rally retraced downward to this level and broke through it. The first time it was violated, price recovered, rising back above it, and the .50 and .382 retracements as well, and then price failed shortly afterward, falling back below all three retracement levels.
Notice on the futures chart above that ES1 made a weak attempt to break and hold above this .618 retracement level this Sunday evening, March 13, 2022. But after a briefly breaking above it, it fell back below it. This .618 will be an important level to watch this week. If it holds as resistance, further downside is expected near term.
Next, consider the following chart of ES1, showing the retracement levels for the recent decline March 3-8, 2022. Drawn from the high to the low of this decline, the .618 retracement is at 4311.75. Price retraced from the low of this decline back to this .618 level at 4311.75, and then reversed. So 4311 has served as an important resistance level. And because price could not retrace above the .618 retracement of its most recent decline, this supports more downside potential in the near term.
In considering very short-term time frames, the 30-minute chart below shows the rally from March 8-11, 2022 (late last week). The key retracements have been drawn on this chart as well. This evening, price seems to be breaking through the .618 retracement of this most recent 3.5 day bounce. This .618 retracement is at 4210.75. Last Friday, price broke through it at the end of the session, a bearish signal, but then this evening, price broke back above it briefly before failing a second time. This second failure to hold the .618 retracement of last week's rally suggest bearish action this coming week.
Other Technical Evidence
Other technical evidence supports the bearish case near term, as well as perhaps intermediate term (though sharp bounces should be expected). the downtrend line shown on the ES1! chart has been held since the all-time high in early January 2022. Stochastics supports a strong downtrend on both daily and weekly charts. Notice how %D is curving back downward after a weak bounce that could not even recover the 30 level.
ADX remains elevated at 37.14, with -DI holding above +DI.
And AO (the lowest positioned indicator on the chart above) reveals continuing momentum to the downside, as shown by red bars increasing to the downside below zero.
EFI is the indicator just above the lowest positioned indicator on the chart above. It shows a below zero reading with the recent bounce not recovering above zero, indicating that bears remain firmly in control—note the bullish divergence, however, with higher lows even though price made lower lows. It will be interesting to see whether this divergence remains intact in the week or two to come.
Overall, the bearish thesis remains. But caution is warranted as discussed above. Bear-market rallies can be violent and catastrophic for those entering short positions heavily when the market remains extended to the downside.
Summary of Key Levels
The key S&P 500 levels below use the SPY (the SPDR S&P 500 ETF Trust), as that is the security used as a trading vehicle by many who trade S&P 500 stock and options.
434.26 = Kijun (Ichimoku Base Line) on the daily chart
429.49 = 3/9 swing high and .382 retracement of 2/24 - 3/3 rally
428.12 = Tenkan Line (Ichimoku Conversion Line) on the daily chart
423.92 = Kijun (Ichimoku Base Line) on the 195-minute chart
422.33 = .618 retracement of 2/24 - 3/3 rally and the .50 retracement of the 3/8 - 3/9 bounce
420.76 = weekly darvas support level
420.62 = .618 retracement of 3/8 - 3/9 bounce which has now failed as support as of Friday 3/11
415.12 = 3/8 swing low
410.75 = 2/24 swing low
400.00 = 1.00 extension of 1/4 - 1/24 correction as projected from the 2/2 highs. It is also the lower edge (return line) of a parallel downtrend channel
Note
The Nasdaq has a similar pattern to the SPX, but it's just weaker. The chart below shows the Fibo levels for the 2/24 - 3/3 rally and the 3/3 - 3/8 decline. Notice how price failed to rally above the .50 retracement of the 3/3 - 3/8 decline (see the yellow ellipse). This .50 retracement level = 335 (334.99), and this level aligns well with the .50 retracement of the 2/24 - 3/3 rally, which sits at 334.19. This level held firm as resistance.Next, price failed at the .618 retracement of the 2/24 - 3/3 rally (see the blue ellipse). But price did not break through without a fight. Price crossed below this level and then above it about 7 times before finally falling below. Quite a chop fest. This reveals what traders already know—March was extremely frustrating for trend traders given the violent chop back and forth.
Note
SPX / SPY has made good progress in the expected direction this morning. A short-term uptrend line going back to March 8 has been drawn, showing the countertrend moves since last week. That line was violated to the downside this morning. The line is drawn on the 30-min SPX chart below. Note
One more brief update here. SPX closed very near its lows today, March 14, 2022. This was another piece of evidence adding a couple points to the bearish case. In my above post, I mentioned 415.12 on SPY as a level to watch. The equivalent level on SPX is 4157, the lows from last week, which equates to about 4138 in ES1 futures. So far, this level has held, but tomorrow and Wednesday's price action may see it break, unless a bounce is imminent.
I am keeping bearish options positions (small sizing) open through tomorrow and perhaps Wednesday.
Anything can happen, so I'm being more cautious as this should be a volatile week with quad-witching expirations on Friday and FOMC presser on Wednesday. If the put-call ratio spikes above its highs for the past couple months, and if VIX hits 38-40, it might be a buyable dip. In the meantime, it would seem that SPX heads lower based on all the price action last week and this week.
Note
Today's bounce so far has not changed the downtrend structure. But the short-term uptrend line violated to the downside yesterday has been recovered this morning. But a downtrend line is holding as resistance, leaving a sort of triangle pattern. Such triangle patterns usually resolve with a breakout in either direction. At this time, the breakout direction is not signaled. The reaction to FOMC tomorrow may help shed light on the direction the breakout will go.Note
All the technical evidence pointed bearishly a few days ago except the divergences, which I had mentioned as a risk factor for a major bounce. But this rally is resolving the triangle that formed with a breakout to the upside. I'm watching 4300 - 4322 as a key resistance level, but I'm closing all bearish trades for sure.Note
At this point, the markets have proven that the bearish outlook and technicals from several days ago decisively wrong. It seemed as a sort of bear trap. There were even lower lows and closes near the lows on March 8 and March 14. But it appears that the multi-month downtrend line has broken. I'm not sure this places SPX in an uptrend back to all time highs, but for now, that short squeeze was impressive and has not shown evidence of slowing down.
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