3 Reasons to Look for a Bounce in the S&P 500 and 2 for Continuation


The S&P 500 has been a frustrating place to store your money the last 18 months. Unless you are trading the range you have been ecstatic as it approaches new all-time highs only to be disappointed when it cannot break through and falls back. The Brexit decision has acted as a catalyst for the latest pullback in the S&P 500. It has been swift but not devastating to this point.

A drop of 5.3% as measured in the SPDR S&P 500 Trust ($SPY) in just 2 days. The ETF still remains well above both the August lows and the February lows, though sentiment seems to be stacked against it. I cant tell you how many times I have seen this 5% drop described as carnage. 2008 was carnage. This is a pullback, so far.

With the market leaning lower, where will this pullback stop? There are signals that suggest it could be as early as Wednesday. And then there are signs that it could continue as well. The chart below shows you both. In the bounce column, you can start with the move lower taking price well outside of the Bollinger BandsĀ®. This can happen for short periods of time, and did for at least 3 days in August, but it does not tend to persist in the SPY.


Momentum is becoming oversold as well. The RSI is about to cross 30, an oversold level. The pullback has also retraced 38.2% of the move higher off of the February low. If there is strength in the market this is a good place for it to be bought and bounce. Of course none of these signals are a guarantee, but put together they suggest you pay attention. And as I write this Monday night the S&P 500 Futures are bouncing.

But the other momentum indicator, the MACD, continues to fall. This shows momentum to the downside and it is no where near the extreme levels reached in September and January. Plenty of room to move lower. The options open interest this week also gives room to the downside. There are S&P 500 options expiring Wednesday, Thursday and Friday this week. The most concerning for those looking for the downside are the June 30 Quarterly Expiry options that have very large open interest at both 1950 and 1900, roughly corresponding to 195 and 190 in the SPY.

Nobody can tell you what will happen tomorrow, or next week. All you can do is watch the S&P 500 and manage risk. But as you do so pay attention to these signals. As more and more point in the same direction you can start leaning that way too.

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