With the stock market turning some from all time highs last week, it has some people questioning whether this is the top and if there is more downside to come. Let’s take a look at the charts and forget any biases as we do so.

Take note that coming up we have the FOMC meeting this week on Wednesday.

First, we’re in the middle of the September monthly candle. I like to zoom out and get some perspective from the big picture first. Monthly SPX chart below:

SPX S&P 500 index monthly chart
First monthly red candle after 7 consecutive green candles appearing

Takeaways from the monthly chart:

  • Middle of the month, but if the SEP monthly candle were to close here we would assume a monthly bear candle which would continue into OCT’s monthly candle
  • AUG monthly candle was only the third time in 25 years of S&P 500 futures trading when the monthly candle closed green seven times. Over the course of the S&P 500 index SPX, there have only been six times in the last 60 years where there were 8 monthly bull candles, and never have there been more than eight. Either OCT, or SEP and OCT should logically be red.
  • I would expect a larger correction on the close of either a SEP or OCT monthly red candle, leading SPX back towards the monthly 10ma currently at 4128, or possibly further to 4000. That would be a 10%+ correction.
  • That would bring SPY back to 411, or just under 400.
  • Bulls would like the following outcome on the monthly chart:
    • For the monthly candle to close as close as possible to the open, 452.56 on SPY and 4531.57 on SPX
  • But that is over $10 away on SPY. Bears would like:
    • A monthly candle that closes near its low, and to close outside the rising wedge
    • Keep in mind that preferred outcome is where we are now, although down closer to the monthly 5ma is even better, and we still have 9 trading days left in the month.

Now let’s take a look at the weekly chart:

Rising wedge and upward channel, with rising wedge breaking

Takeaways from the weekly chart:

  • S&P 500 has been in a channel since APR of 2020, so more than a year. There has only been one pullback to the weekly 20ma line, which would immediately bought back even harder the following week.
  • There has only been five closes below the weekly 10ma line, with price following even higher the next week or the week after.
  • The weekly rising wedge has broken down as of last week’s close, but we keep moving this line as price progresses higher.
  • Most likely we see SPY and SPX move back towards the bottom of the weekly channel, 4120 on SPX, which coincides with our thinking on the monthly chart.
  • The alternative is that the pattern of weekly 10ma crosses continues, and this coming week sees buyers take control again. If the S&P 500 can at least finish the week flat, as on this same week of SEP in 2020 last year or like the first week of MAR this year, we could expect the market to continue higher.
  • With two consecutive large bear candles on the weekly chart, the odds are increased that the bear scenario plays out.
  • The bears want next week’s weekly candle to be:
    • a bearish candle closing near its lows, convincing others that all buyers have taken profit and sellers are in control. If we see 3 bearish candles in a row here, this would be the first time since the crash last year, and it would draw in more sellers as a sign of a 10-15% correction that is underway. We would be looking for a correction larger than last SEP’s selloff, which was just over 10% from the top of the channel. So we would be looking for a 10-15% selloff.
  • The bulls want next week’s candle to look like:
    • We already have a close below the rising wedge trendline, so bulls will want this to end as a look below and fail. That puts SPX over the open of last week’s candle, therefore an engulfing bullish candle (over 4475 SPX). This would be enough to cause a seller shutoff, and bring SPX/SPY back to new all time highs. We still have the overnight ATH lingering and waiting for testing, this would be the target.
  • If we draw fibonacci retracements from the SEP 2 ATH, down to the low of the March 2020 selloff, it brings SPX back towards 3990.31. This coincides with the idea of a 10-15% selloff (3990.31 would be approximately 12%).

Finally, let’s take a look at the daily chart:

Zoomed in rising wedge break, and view of the channel

From the daily chart it becomes quite obvious what is happening, and provides a little more support for both the bear and the bull cases.

  • Here you see the rising wedge has broken, the daily 20ma has proven to be resistance four times, giving the bears all the confirmation they needed to bring price to a new recent low on Friday.
  • Following the top trendline, you see a cloned trendline below supporting price close to where it closed on Friday, giving some support to at least a near-term bull case.
    • For the bull case to pan out, we would look for a Monday daily candle that painted as a reversal (ideally as a spinning top with a body outside Friday’s close, even better if it held the dashed trendline). The daily 20ma is still not pointing down, providing some support of this theory. The extreme version of this scenario would be a repeat of June 21, July 20 and August 19, making September 20 timely for a repeat with a large engulfing bullish candle crossing the daily 20ma. Also making it a repeat of the June/July/August rotation would be a look below and fail of the daily 50ma line. Completing this pattern would satisfy the bulls that sellers have not gained control.
    • The 50ma daily test and reverse case is also supported nine times in 2021
    • Should we see a Monday reversal candle, we would look for a return to all time highs by week’s end, certainly by month’s end.
  • There is a lot to see for a bull case stated above, but the bears are seeing plenty of signs for their case as well.
    • In none of the June/July/August rotations did price reject so often at the daily 20ma.
    • In the past nine times price has attempted the daily 50ma, it has never closed below it two candles consecutively. A bear close Monday would contradict this, and void the June/July/August pattern.
    • The first target for bears would be the August 19 low, then the July 19 low, then the June 18 low which would put price close to the daily 200ma. We should expect another 2-5% correction below this before price heads back up. Breaking below the 200 could trigger a sub-4000 SPX selloff. This is not the most likely outcome before buyers take back some control, unless there is an underlying cause similar to 2020.
    • The most likely longer term outcome is a sideways market.

We will be going over these scenarios more in depth daily in the trading room, join us if you aren’t there already!

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William Wallace