US markets to open below key supports; Is a larger drop coming?

Summary:

• Red across the board for US indices ahead of the open

• S&P500 falls below 2800 to 2 ½ month low

• Head and Shoulders and Cloud break in play

After hitting an all-time high a little over a month ago, there’s been a notable pullback in US stocks with the re-emergence of US-Sino trade tensions weighing on risk sentiment. The S&P500 is currently trading only a little over 5% from its record peak of 2962, but there is some suggestion that the decline could just be getting started with two long-term technical signals being triggered - A break below the Ichimoku cloud on a daily chart and a potential head and shoulders.

Is the trend turning lower?

While there has been weakness in recent weeks for the S&P500 the longer term picture has remained one of an uptrend according to most measures. However, the latest drop has seen the market move back below the Ichimoku cloud on a daily time frame for the first time since January. Even though the accompanying lines haven’t confirmed the break yet, prior moves through the cloud have done a pretty good job of capturing the prevailing trend and this could be seen to suggest it is in the process of turning lower. Due to the cloud still being projected higher in the next few weeks it is possible that price stays below the cloud and recovers somewhat but unless price gets back above it then this indicates the market is now longer in an uptrend.    

The S&P500 has broken back below the D1 cloud in what could be seen to suggest a change in the long term trend. Source: xStation  

S-H-S targets 2642?

The declines seen ahead of the opening bell have also caused the S&P500 to drop below prior support around the 2800 mark and this level could be seen as the neckline in a head and shoulders formation. With the head being taken from the record high 2962 this would target a measured move to 2642 if it plays out in a textbook fashion. Today’s trade could well be key here as it’s worth pointing out that while the 2802 level has been breached the daily candle has not confirmed the break yet and a close back above 2802 would invalidate the setup.

Price has fallen below a possible neckline in a head and shoulders setup for the S&P500. This would target a measured move to 2642 if it plays out in a textbook fashion.