Over the last few trading sessions, the S&P 500 has started to look more bearish. First, on Friday, we saw a bearish engulfing candle on the SPDR S&P 500 ETF (SPY), which tracks the index. This happens when a stock or index makes a higher high than the previous candle, yet closes below the previous day’s low. This move is very bearish as it signals that buyers could not support shares, and, in fact, sellers took full control and closed them at their lows.

Further signs point to the S&P 500 heading lower: We're seeing a bearish moving average convergence divergence (MACD) reversal to the downside, while the relative strength index (RSI) is showing a negative divergence between price and strength. While the S&P 500 is still higher over the course of October, relative strength is lower. When relative strength shows a negative divergence, many times that can foreshadow future losses as there is weaker market breath and less leadership in the market.

Source: Tradingview.com

Looking past the S&P 500, we are seeing similar negative MACD crossovers in the Nasdaq 100 and the Russell 2000, signaling that this momentum reversal is consistent across all markets. The Dow Jones industrial average has not yet had a negative MACD reversal, which is mainly due to strong earnings performances in component stocks that have kept the index rallying.

Looking at the S&P 500 from a fundamental view, the most likely action over the next week or two is going to be dictated by earnings. Negative results would pressure the index and likely cause a correction. But if earnings outperform, the S&P might be able to find support at upcoming support levels. As of now, Friday’s high of $257.50 remains strong resistance, as this is the upper end of the bearish engulfing candle. Watching how the S&P handles this level, should it trade back up, will also signal how strong the market is.

The Bottom Line

After creating a bearish candle last Friday, the market is now vulnerable to a downside move. With bearish technical indicators, specifically a negative moving average convergence divergence (MACD) and a bearish engulfing candle, there is an extra emphasis on earnings now to support the S&P 500.

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