Previous Price Action
I think many traders were shocked by the severity of the mini-crash that occurred recently on the US stock markets because it seemed to come out of nowhere, even though many traders and investors have been expecting some kind of pull-back for quite a while now.
Since then there hasn’t really been a continuation of the sell-off because the price seems to have consolidated around the 200-day exponential moving average of both the S&P 500 and the Dow Jones.
However after a brief reversal, it is clear that there is not enough momentum to take it back to its previous highs, and worse still, the price action of the previous two trading sessions paints a bleak picture.
On both occasions the price traded a lot higher during the day, but ended up falling back and closing close to its opening price, which is a very bearish sign.
Furthermore, the futures prices of both of these markets are currently suggesting that the price is set to open a lot lower later today.
Future Direction
It is generally a bad idea to make predictions, particularly if you are backing your predictions with your own money, but the signs are not good if you are hoping for a recovery.
The two bearish pin bars and what is looking like a significantly lower opening later today is going to take the price further away from the EMA (200), and we have already seen the EMA (20) cross below the EMA (50), which is obviously another bearish signal.
I think the key thing to look for here is to see if the price can break below the previous lows on both the S&P 500 and the Dow Jones, which currently stand at 2709 and 24896 respectively.
If this happens, and the price actually closes below these lows, then there is a high probability that the price will go a lot lower.
Even if the price consolidates below the EMA (200) in the next few trading sessions, there is the potential for the dreaded death cross to occur, where the EMA (50) crosses below the EMA (200).
This would attract a lot of headlines in the financial media, and would almost become self-fulfulling because these negative headlines by themselves often encourage people to sell their shares and force the markets lower.
So while there is always the possibility of a consolidation or even a reversal, the markets are looking very weak right now, and if the price breaks below the recent lows, there could be a much bigger sell-off.
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