The financial world has in its possession a myriad of tools known for forecasting future market trends, and one of the most popular among these tools is the various types of charts. Of late, the charts under scrutiny that seek every investor’s attention is the S&P 500 chart. A surprising turn of events has showcased the charts to be flashing a firm No Go signal for the S&P 500. This article sets out to examine this development, ponder upon the reasons for this signal and how investors can navigate this scenario holistically.
The first facet that leads to comprehension of this No Go signal is an understanding of Technical Analysis. In essence, Technical Analysis is a trading discipline employed to evaluate investments and identify trading opportunities. Its basis is on statistical trends gathered from trading activity, such as price movement and volume. For many, it is the holy grail for predicting future market movement; its verdict -divorced from bias and sentiment- has always been revered. It is within this discipline that the No Go signal for the S&P 500 has been discovered.
The primary contributing factor toward this negative alert is the formation of several bearish chart patterns. To begin with, these bearish chart patterns include the Double Top, the Head and Shoulders pattern, and the Rising Wedge. Each of these patterns, particularly when witnessed consecutively, suggests an impending downward trend for the index. These bearish patterns, known for their accuracy in predicting market decline, have been sighted several times recently on the S&P 500’s charts, signaling a potential major pullback.
Another vital catalyst for this No Go signal is the volume divergence which is evident on the S&P 500 charts. For instance, the On Balance Volume (OBV) – a tool that uses volume flow to predict changes in stock price – has been on a decline despite the prices having hit a record high. This volume divergence is usually a sign that the upward price move is not supported by the market participants and could hence indicate a possible reversal trend.
Add to this the indicators like Falling Moving Averages, bolting of Bollinger Bands, and Relative Strength Index (RSI) sliding into the overbought territory, all of which are signaling a bearish territory for the S&P 500. Moreover, these technical signs have turned more ominous as they have been accompanied by news of economic slowdown and pervasive uncertainty over trade wars, which have further corroborated the bearish stand.
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