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Last week saw gap downs that took some of the indices to their moving average. Since then, indices have been rallying back to their breakdown gaps, with Monday marking the end of this process.
Where markets go from here is up for debate, but either resistance created by the gap down kicks in, or the gap is negated, and markets take this as an opportunity to kick on higher. It’s potentially a swing trade, as going sideways is not the usual reaction to this.
We need to watch the relative relationship of the indices to their 200-day MAs; at the moment the S&P 500 and Nasdaq are inside the 15% zone, and the Russell 2000 in the 10% zone of historic price extremes (i.e. indices are further above their 200-day MAs than 85-90% of price action dating back to the inception of the indices); if these get into the 5% zone, then sell or take profits.
The Russell 2000 (IWM) finished with a small black candlestick, which is typically bearish. Adding to this are ’sell’ triggers in the MACD, On-Balance-Volume, and a relative performance loss against the Nasdaq. Volume declined across this gap down, which is probably a good thing for bulls, and it did hold on to 20-day MA support following the gap.
The damage to the S&P 500 was less severe, and the drop is more in line with a pullback in a bullish trend, with not even the first line of support tested. Look for the rally to continue. The ’sell’ signal in the MACD is weak.
It’s a similar tale for the Nasdaq as for the S&P 500; it sits 15.3% above its 200-day MA on a solid bullish trend and just a weak MACD ’sell’ to contend with.
Just for the record, the relationship of the indices to their 200-day MAs is a reliable trade indicator; the last signal was a ’buy’ in April 2025 across the S&P 500, Nasdaq and Russell 2000. We have a developing ’sell’ in all of the indices, although the rally may not be over yet; it likely will be soon.