Introduction

As a day trader, you always want to see strong trends upwards or downwards with plenty of volatility because this will enable you to either ride these trends upwards or downwards, or trade the reversals when these trends run out of momentum.

The one thing you don’t want to see is a very narrow trading range with little or no volatility because this can make it very difficult to find winning trades, and can actually destroy accounts.

However this is exactly what we saw in the first 3 hours of the trading session when the S&P500 market opened earlier today, as you can see below:

Trading Range

The price did fall later in the day, but during this opening 3-hour session, when most day traders like to trade, the price of the S&P500 was just drifting in a sideways trading range between about 4178 and 4185, which is just a 7 point range.

There were a few occasions when the price moved out of this range, but it quickly moved back to this trading range each time.

Why Narrow Ranges Are So Hard to Trade

There are some day traders who like to trade tight trading ranges like this, and will just continue to sell short at the top of the range and go long at the bottom of the range, capturing small profits each time, but the vast majority of day traders don’t trade like this.

Most day traders will tend to trade breakouts out of this range in the hope of capturing the start of a new trend, and when you get a sideways market like this, it can potentially destroy accounts as traders keep getting stopped out on every possible breakout.

The problem is that you don’t really know that the market is going to trade like this before the market opens. In fact the S&P500 (future) actually moved more than this when the US market was closed, trading as high as 4210 in the overnight Asian session.

So you would think that having fallen so much out of hours, the price would move a lot more when it actually happened, but this wasn’t the case today.

Closing Comments

The point I want to get across is that very tight trading ranges are generally very bad news for the vast majority of day traders because they can really chop you up and result in lots of small losses.

There is no way of knowing whether you are likely to experience a day like today ahead of time, although the market will sometimes give you clues.

For example, if you get two or three days where the trading range has been well above the ATR (average true range) on the daily time frame, then there is a higher chance that you will see a smaller consolidation day with a tight range at some point.

Similarly, if you have a large daily candle up and an equally large daily candle down with the price closing somewhere near the middle, you are quite likely to see an inside bar day in the third day.

Finally, if the price has been trading in a narrow range on the higher time frames, which the S&P has been doing, then this increases the chances of a tight range as well.

Therefore if you are struggling to make money from day trading the S&P right now, you certainly aren’t alone.

The S&P500 can be a great market to trade, but it might be a good idea to trade more volatile markets such as oil or the major forex pairs when this index continues to trade in a narrow range on the daily chart.

2020 Price Action So Far

It is fair to say that 2020 has been a complete disaster for many stock market investors thanks to the global coronavirus pandemic that has effectively closed down the world’s economy.

You only have to look at the price chart of any mid-large cap stock, or any major stock market index for evidence of this.

The S&P 500 is a classic example. Even as recently as February, this index was closing in on 3400 and making new all time highs before the virus started spreading outside China.

However things really turned negative in March as the effects started to be felt in many countries all over the world, with thousands of new infections and rapidly growing death rates ultimately leading to complete lockdowns and the closure of many businesses.

Subsequently, the S&P 500 fell all the way down to around 2200 at one point, so it is quite remarkable that it has since recovered back up to the 2800 level.

Strong Resistance

At the moment, however, it is hard to see this upward price move continuing for much longer.

As I posted on my eToro feed yesterday, it is getting closer to its 200-day exponential moving average, which by itself often acts as strong resistance.

However the fact that this indicator is also very close to the 3000 level, ie a major round number, makes this even more significant because it is likely to provide even stronger resistance.

Here is the chart that I posted yesterday:

Since then, the S&P 500 has fallen from 2830 to it’s current overnight level of 2800, and all of the additional indicators are still suggesting that this market is currently in overbought territory and likely to fall, as you can see below:

The MACD histogram is slowly falling as the price has been rising and the stochastic indicator is still above 80, suggesting it has potentially reached a peak. The only exception is the RSI indicator because this has not yet crossed above 70, suggesting that the price could yet go slightly higher.

However this latest price chart is still pointing towards further weakness in the coming days and weeks.

The Fundamental Argument

It is all well and good looking at the price charts to make trading decisions, but it is often good to look at the fundamentals as well.

The S&P 500 has been trading on a large P/E ratio for several years now, prompting many to sell their index ETFs, VOO, SPY, etc, and wait for a reversal to buy back in cheaper.

Even though the index is well below it’s all-time high, the fact remains that it is still trading on a very high multiple. As of yesterday, iShares’ IVV was still trading on a P/E ratio of 18.75, and this doesn’t really account for the fact that the earnings part of this formula is likely to fall sharply later this year, pushing the P/E up even further.

Final Thoughts

So these are some of the reasons why I think the S&P 500 is likely to fall in the near future. There are strong arguments both fundamentally and technically why the S&P 500 could easily drop to 2500 again, and possibly even further.

When you also take into consideration the fact that we are still a long way off developing a vaccine for COVID-19, and many countries are still in lockdown, it really is hard to put forward any arguments why this index should rise much further at the present time.