Looking closely at the S&P 500
Markets capitulated yesterday and I exited all my positions. I was planning to hold on to a couple but looking at the momentum downwards decided to fold. So, where are we now? Is this the bottom? As may be expected that is the question in everyone’s mind.
I am not going to be the one to make predictions. I will wait for my model to tell me that the market is back. Looking closely at the S&P 500, we can see the deep capitulation.
This is a 1-year chart of the S&P 500. I have plotted the price in candlesticks, the 40-day moving average of price, the RSI at the bottom and 2 support/resistance lines.
Price decline
First, we can see the last 7 candlesticks depicting the sharp fall-off in price. I remember seeing something similar in Feb/Mar 2020 when the markets started assessing the COVID-19 impacts. This steep drop looks similar.
Support and Resistance
We are way below the 40-day moving average. We are also way below the closest support line which was at 3835. The price is now at 3666 and the 3835 now becomes the resistance that needs to be overcome for any meaningful potential of a reversal. The next support line is at around 3220 per my assessment which is another -12% below current levels. I hope it does not go there, but can it? Yes, that is the reason we call it a support line. Price can test that. However, the upper resistance is only +4% away. So, if price crosses that we have a good chance that level holds.
RSI
The RSI is at around 30 now which is quite low but not the lowest it has been over the last year. We touched 24 in January of this year before reversing. So, there is room to fall there as well.
Conclusion
These are all probabilities of course and the prudent thing to do is not predict what happens. Just take the necessary actions as the price tells us to. This looks like a short-term trader’s market at this time with a bias to the downside. I will wait for a trend reversal to develop before I go long again. Meanwhile, I will look for opportunities to trade short-term using options.