S&P 500 Head and Shoulders Has Room to Run, Or Does It?
S&P 500 Head and Shoulders Has Room to Run, Or Does It?
The S&P 500 is down 3.76% for the month so far
- The S&P 500 broke its 110-trading day streak of holding above its 50-SMA.
- A head and shoulders pattern in /ESM4 suggests a target of 5000.25 on a pullback.
- However, bulls may put up a bigger fight if they can clear a crucial technical level established in recent weeks.
Will the Federal Reserve cut rates in 2024, let alone the first half of the year?
As market participants have grappled with this question through the first two weeks of April, bond yields have soared higher while U.S. equity markets have come under increased pressure. Elevated geopolitical risks surrounding tensions between Israel and Iran are not helping sentiment.
In fact, yesterday, the S&P 500 (/ESM4) closed below its 50-day simple moving average (SMA) for the first time in 110 trading days, the longest such run since March 2011. Technical breakdowns are afoot in all the major indexes, no doubt. But volatility in /ESM4 (IVR >60) is hovering near its highest level of the year, potentially making the current environment ripe for options sellers.
/ES S&P 500 price technical analysis: daily chart (October 2023 to April 2024)
For trend followers and momentum traders, April has been a disappointment.
Recent price action, including breaking the uptrend from the October 2023 and March 2024 swing lows as well as the loss of the daily 21-/34-exponential moving average (EMA) envelope, indicates that the S&P 500 (/ESM4) is very much in correction mode.
Price action in /ESM4 has formed a head and shoulders pattern with a 166.25 measured move calling for a drop to 5000.25. From a technical perspective, there’s little to like from the long side until a deeper setback transpires. That is, unless bulls can overcome a critical short-term level that lingers nearby.
/ES S&P 500 price technical analysis: eight-hour chart (February to April 2024)
A look at the eight-hour period shows that /ESM4 is hovering just below a critical technical level: 5125, a former yearly high and ultimately a level that has served as both resistance and support in recent weeks.
Should /ESM4 establish itself with a close back above 5125 on the eight-hour period, traders may find a workable low. Given the volatility profile of the market, selling put spreads rather than buying call spreads would likely be more optimal to express a long delta perspective.
Either way, the name of the game right now in /ESM4 is patience: bulls have a better shot above 5125; otherwise, the path of least resistance appears to be a decline to 5000.25.
Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx
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