Stock market volatility ahead as retail traders buy?

S&P 500, Dow Jones, Technical Analysis, Retail Trader Positioning – Talking Points

  • Retail investors bought Wall Street’s recent losses
  • This warns that the S&P 500 and the Dow Jones could continue to fall
  • Check out this week’s webinar recording for a deeper dive into this

Despite the recent volatility on Wall Street, retail traders seem increasingly drawn to the discounts offered by the market. Long exposure is building up in the S&P 500 and the Dow Jones, according to IG Client Sentiment (IGCS). The latter tends to work as a contrarian indicator. With that in mind, if this positioning trend continues, could that spell more trouble for the stock market? For a deeper dive into IGCS, technical and fundamental analysis, check out my webinar recording above!

S&P 500 Sentiment Outlook – Bearish

the IGC gauge shows that around 71% of retail investors are net buyers of the S&P 500. Given that the majority of traders are biased to the upside, this suggests that prices could continue to decline. Meanwhile, upside exposure increased by 4.49% and 15.26% from yesterday and last week respectively. Taking these elements into account, the combination of current and recent positioning changes provide a stronger bearish contrarian trading bias.

Technical Analysis of S&P 500 Futures Contracts

S&P 500 futures recently broke out in a bearish head and shoulders chart formation, opening the door for extended losses since late last year. The support level at 4029 from May 2021 has also been removed, exposing the 100% Fibonacci extension at 3924. Further losses would then place emphasis on the late March 2021 low at 3843. Immediate resistance may be the neckline of the head and shoulders, as well as the old support area 4101 – 4140.

S&P 500, Dow Jones Forecast: Stock Market Volatility Ahead as Retail Traders Buy?

Chart created in the trading view

Dow Jones Sentiment Outlook – Bearish

the IGC gauge shows that around 74% of retail investors are net buyers of the Dow Jones. Since the majority of them are biased upwards, this suggests that prices may continue to decline. Indeed, upside exposure increased by 7.81% and 27.34% from yesterday and last week, respectively. With this in mind, the combination of global and recent shifts in sentiment provide a stronger bearish contrarian trading bias.

S&P 500, Dow Jones Forecast: Stock Market Volatility Ahead as Retail Traders Buy?

Dow Jones technical analysis

Dow Jones futures weakened further into the critical support zone of 31951 to 32521. On Tuesday, the index was unable to confirm a hold below this range, strengthening it as support. Confirming a breakout below could open the door for extended losses. In case of an upside reversal, keep a close eye on the April downtrend line. That might hold, restoring the focus on the downside.

S&P 500, Dow Jones Forecast: Stock Market Volatility Ahead as Retail Traders Buy?

Chart created in the trading view

* IG customer opinion charts and positioning data used from May 10and Report

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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