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S&P 500 Tendency to Make a New High Then Drop


The E-mini S&P 500 futures (ES) have moved to a new high in November, rallying to 2211.75 on the December contract. The price has now been stalling in that region since November 22. This peak (and stall) occurs just above the August peak of 2184.25.

Arguments for further upside include:

  • The S&P 500 is in an overall uptrend, and the breakout to new highs keeps that alive.
  • December is one of the strongest months of the year, typically. In November and December the index has moved higher 75% of the time over the last 20 years, and moved up an average of 1.5% in each of those months.

For short-term traders, the tendency in actual price action warrants caution though. Starting in late 2014, moves above the prior high have been followed by corrections, with very little follow-through to the upside once the price stalls.

The only new high that managed to move slightly higher after it stalled was the July and August rally. And there, the July peak was only marginally exceeded by the August peak, so there was very little upside potential once the price stalled out in July.

Figure 1. S&P 500 Daily Continuous Chart

If this tendency holds, the S&P 500 is likely to channel in the 2215 to 2190 region, but if it drops below that, expect at least a 60 point drop and potentially more. Even it goes higher, this rangy/oscillating market isn't likely to zoom higher...and if it does it indicates a significant divergence from the patterns that have played out over recent years.

If the price starts falling, in spite of the December tendency to rally (the price fell in December last year), it is likely to fall at least into the 2140 to 2130 region, and potentially below 2100 based on prior patterns like this seen over the last two years.

The flipside is that this is an uptrend, so keep stop loss relatively close on any short trades taken.

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