The S&P 500 Index, a gauge of the health of U.S. equities, has been showing signs of weakness for several weeks now due to a flurry of blinking red signals in various charts. These signals are hinting that the market might be heading towards a rough patch, a possibility that market participants need to be prepared for.
The S&P 500, often considered as a bellwether of U.S. equities, is an essential index focusing on some of the most significant listed companies of the U.S. There seems to be growing concern that the excessive optimism being exuded from Wall Street could eventually lead to a significant market correction. The following sections delve deeper into multiple charts that indicate this possibility.
#### Bearish Divergence in the Relative Strength Index
A key technical indicator to evaluate if a security is overbought or oversold is the Relative Strength Index (RSI). Typically, an RSI above 70 indicates overbought conditions, while an RSI below 30 signals oversold conditions. As per the latest charts, the S&P 500’s RSI has been displaying a bearish divergence.
A bearish divergence occurs when the price of an asset reaches a new high, but the RSI fails to exceed its previous high. This divergence between the RSI and the price action is a bearish sign, and for the S&P 500, this could imply an imminent retracement.
#### Increasing Volume on Down Days
Another worrying chart formation is that during the recent market correction, volume spiked significantly on down days. This signifies increased trading activity as prices drop, which is typically a sign of selling pressure. Higher volumes on down days are often a bearish sign as they indicate that market sentiment may be taking a pessimistic turn.
#### Shifting Money Flows
Money flow charts can also give essential insights into potential market turns. Some of these charts have been flashing warning signals with money flows shifting away from riskier, high-valued tech stocks towards more conservative sectors like utilities and consumer staples. This defensive reallocation could signal shrinking investor confidence in the broader market’s strength.
#### Amphibious Moving Average
Recently, an ominous formation has emerged on the daily chart of the S&P 500. The Amphibious Moving Average, a special type of moving average that combines short and long-term periods, has embarrassed unforeseen bearish movements. After a prolonged period of bullish trend, the moving average points to a possibly dangerous turn.
These chart patterns create a collective narrative of caution. These are not definitive signs of a total market meltdown but should be viewed as signs of increased probabilities for a correction. As always, investors should interpret these signs in the context of their individual investment objectives, horizons, and risk tolerance. While charts certainly contain valuable information, they should be just one tool in a comprehensive suite that investors employ to make informed decisions. Therefore, investors need to pay heed to these indicators flashing “No Go” for the S&P 500 but also continue to keep an eye on future developments in the market dynamics and adjust their strategies.
