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S&P 500 Crashes Below Two Key Levels

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Important: I use New York close charts so that each 24-hour period closes at 5 pm EST.

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Some traders cringe when they see the word “crash” used to describe a market move, particularly a single-session move. But when a market drops more than 3% in one day and erases 42 sessions in the process, the term crash seems fitting.

That’s what the S&P 500 did yesterday. And for those of you who sold this market per the idea I discussed on September 27th and again on October 5th, you’re sitting on a 5R or greater profit. Not bad for a six-day move.

I alerted members to the breakdown that took place on October 4th. The market had just broken wedge support on a 4-hour closing basis at 2918 and looked ready to move south.

Here’s what I posted in the member’s area on October 4th:

S&P 500 comment

Note that the next three support levels I pointed out on the 5th of October were 2870, 2790 and 2740. We saw 2870 give way yesterday following a slight bounce earlier this week.

Sellers also cleared 2790 yesterday, but the S&P did bounce from 2740 after hours. That means we now have a new range to work with between 2740 support and 2790 resistance.

At this point, you probably want to know where the S&P is going from here. Usually after such an aggressive selloff we see a reversion to the daily mean. At the moment, that’s up around 2870 as measured by the 10 and 20 EMAs.

However, I’d be a little surprised if we see a significant bounce before further losses. Yesterday’s move was not just a selloff, it was a risk-off event or at least the start of one. In my experience, events like this tend to take more than 48 hours to play out.

Given the rising wedge pattern, the S&P may be inclined to test the inception point just below 2700. A retest of the structures low is the base case when it comes to rising wedges.

I do want to reiterate that this does not signal an end to the multi-year uptrend. It’s going to take more than a 3% decline to reverse the rally that began in 2009. As long as this market is carving higher highs and higher lows, the uptrend is intact.

At the same time, don’t underestimate the potential of a true risk-off event. Look no further than what happened during the first few days of February. And that was a mere hiccup compared to the damage a liquidation event could do to this market.

Last but not least, keep in mind that as long as the S&P 500 remains under pressure, pairs like USDPY and EURJPY will continue to suffer. Both are bouncing from support levels I mentioned earlier this week, but the relief may be short-lived.

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S&P 500 daily chart

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8 comments
Sydney Edgar Wentink says

Excellent thanks Justin.

Reply
    Justin Bennett says

    You’re welcome.

    Reply
      SAMINATHAN says

      Brilliant analysis and we want your new trading ideas continuously..

      Reply
        Justin Bennett says

        Cheers, Saminathan. Thanks for that!

        Reply
Mimi says

Amazing and I took the sells. Brilliant analysis as usual Justin and learning so much from you!

Reply
    Justin Bennett says

    Congrats Mimi! Well played.

    Reply
Allegro says

That was quite a sell off. Made some and loss money. Most importantly learning Lots, Thanks for all you do Justin.

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paul mize says

i am interested in your es analysis

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