Idea of the Day Lead indicators look bleak for the S and P 500

What: US bulls were tested on Monday after the S&P 500 threatened to break below the 100-day moving average at 2417, a key support level. Although the index managed to stay above this level, it didn’t bounce off this support signalling that the market may be getting fatigued with the slow grind higher in US blue chip indices.

There have also been some worrying trends in the lead indicators for the US blue chips including:

The Russell 2000 index - a small cap index that is sensitive to US domestic policy and Trump’s (so far) failed tax reform agenda – has fallen through its 200-day sma, a key sign that the bears are in control. According to John Murphy’s Technical Analysis theory, the Russell 2000 is a key leading indicator for the US blue chip indices.
The Dow Jones Transportation Average, also a lead indicator according to Murphy’s Technical Analysis theory, has also fallen through a number of key supports including the 200-day moving average and the bottom of the daily Ichimoku cloud. These are bearish indicators.
The tech giants have led the rally higher in US blue chip indices so far this year, yet some of the FAANGS have failed to recover after peaking in late July including Amazon and Netflix. We believe that any decline in the major US indices will be led lower by the tech sector, so it is important to watch what the FAANGS do next.

How: It hasn’t been profitable to be bearish on the US indices for most of this year, and we would urge caution before running headlong into a short position, especially with volatility remaining at relatively low levels. However, a “hawkish” Yellen at this weekend’s Jackson Hole conference could be enough to tip investor sentiment over the edge and we may see a sustained period of decline for the S&P 500, although the downside may be protected from the good Q2 corporate earnings season.

From a technical perspective, a break and daily close below the 100-day sma at 2417 could trigger further losses, potentially back to the 2350 – the low from May that also corresponds with the 200-day sma, which we expect to act as a key level of support.

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.