The Future of S&P 500 Futures:
New Highs or a Triple Top?
S&P 500 price action was extremely clean Thursday (E-mini shown below) with a large amount of verticality (up/down directional movement). Great vertical movement without much sideways price action is a fantastic market environment for traders — being on the right side of the trend is much easier. Most importantly, today may have been a more significant session than many yet realize...
The morning's bullish trend gave way to 2 hours of indecision before price action turned bearish with a sharp sell-off into the close. Though today's intraday price exceeded yesterday's high, it closed below yesterday's low — resulting in a "Bearish Engulfing" candlestick pattern. The significance of this common candlestick pattern is drastically increased when it occurs after a large rally that is followed by sideways price movement.
This pattern combination often serves as a good warning signal for long-only retail traders to reduce their spec bets because it is precisely where technically oriented institutional traders (and many automated trading systems) will attempt to swing with size on the short side. Why? Because they can precisely define their capital at risk with tight stops on the upside and continue to pyramid in scale to the down.
Take a look at the weekly S&P 500 futures chart below to see that the last four instances of a "Bearish Engulfing" candlestick patterns preceded sharp sell-offs. Candlestick patterns are fractal in nature and it would not be surprising if this daily "Bearish Engulfing" candlestick pattern marked the start of a sell-off over the next few weeks.
But — and this is the fun part — in today's age of automated algo driven markets, basic forms of technical analysis often work much better when they don't. Wait, what?
In the not too distant past when carbon based life forms known as 'humans' were responsible for trading markets, breakdowns and breakouts begat follow-through days and continuation moves that lasted weeks, if not months, until the completion of the pattern. What occurs much more often now, thanks to the dominance of program trading, is that asset classes trade up to or just through the extremes of their recent ranges in order to forcibly trigger orders before returning back into range congestion.
What this means is that technical indicators measuring price and verticality across time, tick and volume have become more important than ever before.
Emphasizing Divergences: Making the Case for a Triple Top
What emphasizes the case for a triple top are multiple bearish divergences on both of our Super RSI and Super MACD Indicators. These new and improved versions of the classic RSI and MACD are able to spot divergences and issue some of the most accurate divergence signals of any trading indicators. As you can see on the chart below, both the Super RSI and Super MACD issued bullish divergences at the market bottom on February 12th and have recently issued bearish divergence signals on April 20th and 21st, which coincide with the all-time high of the S&P 500 Futures.
Monthly, Weekly and Daily Perspective of the S&P 500 Futures
In order to push to a new monthly high for the S&P 500 futures, we would need an ES close over 2072.25 (July 2015's monthly closing level). The candlestick behavior of recent monthly bars is noteworthy because partial to full recoveries were made after price washouts — there were several "V" shaped sell-offs and rallies over the past 8 months, resulting in 4 different monthly bars that have huge bottom wicks. This wicks serve to illustrate for technicians that bears were able to bring the market down to the lower edge of its range but that they could not keep it down there or create a breakdown lower.
For those new to candlesticks: the 'real body', i.e. the box, marks the opening and closing price levels of each bar (each bar represents a specific interval period of time, below is monthly); and the 'wick', i.e. the wick of a candle, marks the high and low extremes of price during each bar.
While it remains possible that price could explode higher or lower without much warning, large upper wicks are exactly what bears will want to see in months ahead. Large upper wicks combined with a failure of price to reclaim closing above the 2,100 level would significantly increase the possibility for a sell-off if not an outright triple top. Conversely, a push higher that reclaims the 2,100 level by closing above it would likely to lead to another small-medium sized rally (7-11%) to new highs. And any monthly close over 2100 would likely see an immediate 3-4% jolt higher as shorts close positions by buying in and risk-parity funds add yet further to their equity weightings.
S&P 500 Futures (ES) - Monthly Chart
S&P 500 Futures (ES) - Weekly Chart
When looking at the chart of the weekly ES, we would need a close over 2092.50 (weekly close of July 17th, 2015) to push to a new weekly closing high — but in this instance the weekly is not as important as either a new monthly closing high or a new daily closing high.
S&P 500 Futures (ES) - Daily Chart
And lastly, looking at the daily chart , we really need a close above the strong psychological resistance level that surrounds round number 2,100 in order to keep the bullish trend intact.
Unless there is a daily close (preferably multiple daily closes) above the 2,100 level, the bears may be getting ready to bring the S&P 500 futures back down to re-test their lower level of support that surrounds 1,800 for a fifth time.