Technical Analysis SP500 – Attempt to get out of the neutral range

August 3, 2016

Worst time of US stock index S&P 500 ion the last 40 years.

With the weak statistics on GDP growth disappointed investors. and the no-expectation of U.S rate hike in the near future, USD related markets are having high volatility.

This article is originally referred from IFC Markets Technical Analysis

On Tuesday, the US stock index S&P 500 decreased due to negative corporate and economic data. Prior to this, 13 trading sessions in a row, it oscillated within the 1st percentage points. Such dynamics was not observed since the mid-’70s of the last century. Theoretically, the period of ultra-low volatility can be completed with a powerful price movement. Will S&P 500 decline continue?

Negative data on the state of the US economy was gradually accumulating. On Friday the weak statistics on GDP growth for the 2nd quarter of this year was released, which greatly disappointed investors.

It was expected that it will amount to plus 2.6%, but in reality, the US economy grew by only 1.2%. This significantly reduced the probability of an early Fed rate increase and caused a fall in the dollar index. Against this backdrop, US stocks increased and on Monday the S&P 500 even updated its historical maximum, as low interest rates and a weaker currency support the activities of corporations. However, later negative data on ISM Manufacturing index for July and construction costs for June were published.

Moreover, construction activity decreased to the minimum during the last 12 months. All this caused a decline in US stock prices. In the corporate sector an unexpected reaction to the statement on the merger Tesla Motors and SolarCity can be noted. Their shares fell by 2% and 7.4%, respectively. Usually after such news one of the companies is growing. On Tuesday weak quarterly and monthly reports of Pfizer, Ford and General Motors came out. Their shares have fallen by 3-4%, pulling on the market.

In addition, market participants considered inadequate the growth of core PCE price index in June, which was +1.6%. According to some investors, this increases the risk of deflation. Let us note that on Friday this week in the US, the data on the labor market for July will be released. In our opinion, the forecast on increase in employment in Non-farm Payrolls is relatively weak and may disappoint investors.

sp500 Attempt to get out of the neutral range

On the daily time frame, S&P 500: D1 has dropped below the last fractal and is near to the lower end of a narrow neutral range. Indicators MACD and Parabolic formed sell signals. Bollinger Bands narrowed slightly, which means a moderate volatility. The RSI is around the level 50. Divergences are not observed.

We do not exclude the bearish movement if the S&P 500 index falls below the minimum of Tuesday: 2150. This level can be used as an entry point. The initial restriction of the risk is probably above the historic high, the trend line and Parabolic signal: 2185. After opening of a pending order, the stop is moved after the signals of Bollinger and Parabolic to the next fractal high. Therefore, we are changing the potential ratio of the profit/loss in our favor.

After placing the order most cautious traders can switch to the four-hour chart and set Stop Loss moving it in the direction of the movement. If the price overcomes the stop level (2185), not activating the order (2150), it is recommended close the position: internal changes that were not taken into account are going on in the market.

Position Sell
Sell stop Below 2150
Stop loss Above 2185

Original Source: IFC Markets Technical Analysis

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