Some noteworthy downside volatility in US stocks in the last couple of weeks has got the global markets quite nervous. Have we seen the top in the market? That risk is certainly there.
The first thing on the chart which jumps out negatively to me is the shooting star candlestick pattern on the weekly chart from last week. That was the result of the market making a new high, then failing and actually finishing low on the period. That’s visible in the weekly S&P 500 chart below.
The other thing I’m looking at which isn’t yet decisively bullish or bearish yet, but which represents potential either way, is the narrowness of the Bollinger Bands. As the lower plot on the graph above shows, that width is at its narrowest for quite some time – lower even than it got in late 2012 before the S&P 500 went on a 100 point rally over the next few months.
Narrow Bands worth both ways, of course. As such, if the market were to fall below about 1775 and get the Bands widening as a result, the implications would be negative. We are already seeing in the daily chart time frame that a relatively narrow Band situation there, combined with the break below the bottom of a key range, is seeing the S&P flip into a negative trend mode.
It looks very likely from the daily chart set up that we’ll see the S&P 500 test the lower weekly time frame Bollinger Band. That would be a meaningful move at this point, so on a first go we may not quite see 1775 broken at this stage. That, however, could just set things up for a move through that level, and the widening of the Bollinger Bands which would happen as a result, signalling a likely longer-term bear trend move. Even then, though, the 1650-1700 area where the market ranged before would be a sticking point.