red light

Technical Indicators for the S&P 500 and Russell 2000 Flashing Red

By:Christopher Vecchio - CFA

Seasonal indicators are also pointing lower

  • The Federal Reserve’s "hawkish hold" has led to nothing good for stocks and bonds.
  • /ESZ3 and /NQZ3 remain in multi-month ranges, but are quickly approaching critical support
  • /RTYZ3 has started to breakdown through the neckline of a head and shoulders pattern.
Year-to-date price percent change chart for /ES, /NQ, /RTY, and /YM
Year-to-date price percent change chart for /ES, /NQ, /RTY, and /YM

There’s an old adage on Wall Street, “sell on Rosh Hashanah, buy on Yom Kippur.”

There’s a statistical basis for this claim: over the past 50 years, the S&P 500 has declined by 0.50% during this holiday window. It also comports with the broader seasonal tendency for equities to decline in September, which has been the worst month of the year for stocks across multiple time periods (5-, 10-, 15-, 20-, 50-years – dealer’s choice).

This year is proving to be no exception to the rule. The Federal Reserve’s rate decision yesterday jumpstarted a sell-off across the four major U.S. equity futures markets, with the Nasdaq 100 (/NQZ3) and the Russell 2000 (/RTYZ3) leading the way lower. High(er) for longer, as evidenced by the Federal Open Market Committee's (FOMC) belief that two fewer rate cuts will be delivered in 2024, has spooked traders, plain and simple. The technical damage is stacking up, and now stocks are sitting on the precipice of a more significant breakdown in price action.

/ES S&P 500 price technical analysis: daily chart (September 2022 to September 2023)

/ES S&P 500 price technical analysis: daily chart (September 2022 to September 2023)

/ESZ3 has broken down out of a triangle that has formed from the March and August swing lows and the July and August swing highs. Momentum is increasingly bearish. /ESZ3’s daily 5-, 13-, and 21-day exponential moving average (EMA) envelope is now in bearish sequential order. The moving average convergence/divergence (MACD) is trending lower below its signal line, and slow stochastics are back in oversold territory. Below the August swing low of 4397.75 a potential head and shoulders topping pattern comes into focus, with a measured move of -287.50 points pointing to 4110.25.

/NQ Nasdaq 100 price technical analysis: daily chart (December 2022 to September 2023)

/NQ Nasdaq 100 price technical analysis: daily chart (December 2022 to September 2023)

/NQZ3 has fallen back in recent days, but still remains nestled in its multi-month range. Momentum is turning more bearish, however. MACD is trending lower below its signal line, and slow stochastics have returned to oversold territory. /NQZ3 is also below its daily EMA envelope, and the EMA envelope is in bearish sequential order. Range support comes nearby at the August swing low at 14792.75.

/RTY Russell 2000 price technical analysis: daily chart (April 2023 to September 2023)

/RTY Russell 2000 price technical analysis: daily chart (April 2023 to September 2023)

Among the three U.S. equity futures covered in this note, the technical outlook for /RTYZ3 is easily the most disconcerting. Having broken below the critical 1820/50 area –which has been both support and resistance since the onset of the regional banking crisis in March–it now appears that a head-and-shoulders topping pattern is in play. Momentum is bearish, through and through (MACD, slow stochastics, and the EMA profile). With regional banks leading lower amid a push higher in U.S. Treasury yields, a return to /RTYZ3’s yearly low at 1750 is in the cards—and a deeper setback is looking increasingly possible.

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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