'Santa rally' hopes shatter on S&P 500 selloff
Bulls' hopes for a year-end rally in the S&P 500 were already on shaky ground following continued trade war noise surrounding the Huawei CFO arrest, but Friday's sell-off has likely put them to rest.
Summary: The flagship technology equity index has been flagging warning signals for several months, so what do the charts say about what's coming next?
Nasdaq 100 tested and bounced of its support area just below 7,000 or 6,963 to be more accurate. (Please note a round number is not a support area just because it is a round number.)
If the rebound does not continue today and the Index closes above 7.179.
The bigger picture in the medium term
As you can see from the below weekly chart of the Nasdaq 100, there has been divergence for a very long time, since June to be precise. In other words, warning signs have been around for quite some time. Top and reversal was signalled two weeks ago with a bearish engulfing candle that confirmed a double top pattern.
The double top target was reached with the sell-off last week. The last time we saw similar divergence was prior to the 2015 volatility episode. There is still divergence that hasn't been unwound, i.e. traded out, and RSI hasn't closed below 40, so volatility should be expected.
As can been seen on the daily chart below, the Nasdaq 100 sell-off accelerated after it broke the rising trend line to close on the important support at 6,963 where after we saw a rebound Friday, taking the Index back above the 200-day moving average.
During the sell-off the divergence recorded on the daily chart was unwound and if the Nasdaq 100 closes above 7,180 Monday we could see a further rebound potentially up to around 7,350. A close below that level would mean a great risk for another push to test support.
One-hour chart of USNAS100 CFD (future)
RSI is struggling to close above the 60 threshold as indicated in the circle. If it continues to fail throughout the day a retest of lows from last week is likely. The level 7,180 seems to be crucial.