A change of character bar was observed on Black Friday, 26 Nov in S&P 500, Russell 2000 and Dow Jones, which essentially stopped the uptrend since 13 Oct.
After the Black Friday selloff, there was increasing of supply last week to push the 4 US indices down. As shown in the daily chart below, S&P 500 E-mini Futures (ES), E-mini Russell 2000 (RTY) and E-mini Dow Jones Futures (YM) broke the support levels (as annotated in the orange line) on 26 Nov (highlighted in blue) while the outperforming index, Nasdaq 100 E-mini Futures (NQ) also broke the support on 1 Dec followed by a test and continuation to the downside in the next 2 days.
S&P 500 Price Action and Volume
It is crucial to analyze the price action and the volume in order to find out the dominating force (either supply or demand) in the market in order to anticipate the market direction.
As shown in the screenshot from my private Telegram Group for Mastering Price Action Trading above, there was presence of demand on 30 Nov 2021 when compared to 26 Nov’s, yet the results for the next day was bearish with big price spread, suggested that the demand was overwhelmed by the supply, which pointed to more weakness ahead.
As S&P 500 tested the first support area near 4500, it rallied up after an oversold condition as it hit the oversold line of the down channel as shown above. There was a shortening of the thrust to the downside with increasing efforts suggested presence of demand at the support area. Once again, the bull could have a chance to rally up after reaching the oversold condition. Pay close attention to how S&P 500 will interact at the axis line (where the support-turned-resistance) near 4625 if it happens.
Given the significant increase of the supply together with the strong bearish momentum as shown in the price spread and velocity since 22 Nov, we could expect a lower low test to around 4450.
Intermarket Relationship: US Dollar Index (DXY) vs S&P 500
Next, let’s take a look at the intermarket relationship between the US Dollar Index (DXY) and S&P 500 below:
As shown in the weekly chart comparing the US Dollar Index (DXY) and the S&P 500, DXY formed a downtrend since 2017 while S&P 500 was in a nice up trend. In 2018, DXY started a rally and flattened in 2019 while S&P 500 formed a correction and consolidate in a trading range from 2018-2019. In 2020 during the COVID -19 selloff, DXY spiked up while S&P500 had a deep correction. Since the COVID-19 low, DXY was in a downtrend and formed a base in the first half of 2021 while S&P 500 in a strong up trend.
In Sep 2021, DXY broke out from the base and is currently in an uptrend heading towards the previous high at 100 while a correction is still unfolding in S&P 500.
Based on the inverse proportion relationship between the US Dollar Index and the S&P 500 since 2017, this could point to more weakness ahead in S&P 500 given the current strength in the US Dollar Index.