S&P 500 Index Charts Show Bearish Agreement -- How to Trade It

The broad market took a hit in Tuesday's session. While it wasn't that bad on a percentage basis due to a rally in the final two hours of trading,  important levels of support were tested or broken on the major index charts.

It is a good time to assess the recent action by taking a look at the S&P 500 index on multiple time frames.  

The monthly chart of the S&P 500 depicts an interesting transition in momentum that has occurred over the last four months. The index on this time frame had been trading in a horizontal channel that began forming in early 2015, but it penetrated channel resistance this July, forming a large white or positive candle. 

That was followed in August and again in September by individual doji candles, or candles with very narrow opening and closing ranges, which reflect a stalemate between buyers and sellers.

The October candle had a large dark body and closed near the low end of its range and right on the former resistance-turned-support channel top.

This sequence of candles is similar to an eveningstar reversal pattern and represents a transition in sentiment from bullishness, to a neutral state, to bearishness.

On the weekly time frame, the recent rollover or bearish transition has taken the 10-week (50-day) moving average with it . This week's candle, which is not yet fully formed, touched the lower area of the monthly channel top range. It was able to bounce off its low of the day and close near the middle of its not-fully-formed range, creating a hammer candle in the process.

The relative strength index dropped under its 21-period average as the July high was being made, about the same time the moving average convergence/divergence oscillator made a bearish crossover.

These are intermediate-term signs of declining momentum, while the vortex indicator, designed to identify early shifts in trend, has made a bearish red-over-green crossover. Chaikin money flow is still well into positive territory, but the money flow index, a volume-weighted relative strength measure, has dropped below both its 21 period average and center line.

The potential hammer candle forming at the 2100 level -- and its bullish implication of "hammering out" a bottom -- may give the index enough time for the technical indicators to realign, and allow a move that could recapture the top end of the channel.

That's a lot of responsibility for one candle not yet fully mature to handle, but it is an alternative scenario to a continuation of the monthly decline, and it is important to consider possibilities when examining the charts on multiple time frames.

The daily chart shows the recent consolidation as a right angle triangle pattern above the horizontal base support area, and below a downtrend line that is being reinforced by the 50-day moving average.

Moving average convergence/divergence and the stochastic oscillator began moving in bearish divergence to the index in late July, and both have continued lower and are below their center lines.

The aroon indicator is another early trend indicator, and it identified the bear shift shortly after the September high. Overall volume has moved above the 50-day average of volume. Chaikin money flow reflects distribution over the last two months, and has now entered into negative territory.

A bounce off the 2100 level is a certainly a possibility, but the sustainability of such a move is called into question when you have a very rare agreement of bearish signals on the monthly, the weekly and the daily time frames.

This article is commentary by an independent contributor. At the time of publication, the author is long SDS.

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