The S&P 500 is currently under pressure, with the technical outlook confirming this trend. The Double Top pattern around 6921/6919 is a key indicator of further weakness, which began its decline on 12 December.
There is an anticipation that the market will test 6683 as the initial target, with deeper support potentially at 6535. There is an expectation of initial buying at these levels and potential short-covering.
Opportunities To Establish Short Positions
Current rallies are seen as opportunities to establish short positions. If the market does not surpass 6769, further declines might follow. Surpassing this level could lead the market to 6823/6826, expected to act as a resistance.
The Santa Rally, typically lasting until the second week of January, might only offer temporary selling opportunities. Weekly charts remain negative, influencing longer-term positions.
Monitoring these levels is essential in upcoming sessions.
Bearish Double Top Formation
The S&P 500’s recent failure to break through the 6920 area confirms a bearish Double Top formation. We saw the market reject this level on December 12th, and this weakness points towards further downside. For traders, this is a signal to consider buying put options or establishing bearish credit spreads, anticipating a move towards the initial 6683 target.
This technical pressure is happening as the latest inflation data from November showed core CPI remaining stubbornly above the Fed’s target, increasing worries that interest rates will stay higher for longer. We’ve also seen the labor market cool, with the most recent JOLTS report showing job openings falling to a two-year low, suggesting the economy is slowing. These factors support the view that any upcoming market strength will be short-lived.
We should view any rally toward the 6769 level as an opportunity to add to short positions or sell call options against existing holdings. The CBOE Volatility Index (VIX) has already jumped over 25% this month, reflecting growing nervousness among investors, which often precedes further declines. If the market pushes past 6769, the 6823/6826 zone represents an even stronger area to initiate shorts, as it would likely act as a firm ceiling.
While we are entering the period historically known for a Santa Rally, we should be cautious this year. Historically, when this seasonal rally fails to appear, as it did before the downturns in 2000 and 2008, it can be a significant warning sign for the new year. The fact that weekly charts have turned negative confirms that larger funds are likely positioning for weakness, making any holiday rally a prime opportunity to sell.
