Retail Trader Signals Hint to Proceed With Caution

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

• IG Client Sentiment still warning that the Dow and S&P 500 may fall
• This would place the focus on year-long rising support, will they hold?

Last week, IG Client Sentiment (IGCS) – a gauge of retail trader positioning – was warning that the Dow Jones and S&P 500 were at risk of turning lower. IGCS is typically a contrarian indicator, meaning that if long bets are rising in an asset, prices could be vulnerable to a pullback and vice versa.

Since then, volatility has been picking up, with choppiness seen in US stock market benchmarks. Meanwhile, the level of net-long bets in the Dow Jones and S&P 500 have remained elevated compared to recent history. Now, it seems like investors ought to continue remaining on guard.

Dow Jones Sentiment Outlook – Bearish

The IGCS gauge implies that about 38.83% of retail traders are net long the Dow Jones. Upside exposure has increased by 8.85% and 25.54% over a daily and weekly basis respectively. Recent changes in sentiment warn that the current price trend may soon reverse lower despite the fact traders remain netshort.

Technical Analysis

The Dow Jones formed a Bearish Engulfing candlestick pattern towards the end of last month. This is typically a reversal warning that can appear at the top of a given uptrend, but downside confirmation has been somewhat lackluster. Moreover, the broader uptrend has been holding, supported by rising support from March 2020.

Dow Jones Futures Daily Chart

Dow Jones Chart Created in Trading View

S&P 500 Sentiment Outlook – Bearish

The IGCS gauge implies that roughly 46% of retail traders are net long the S&P 500. Upside exposure has climbed by 2.04% and 4.41% over a daily and weekly basis respectively. Recent changes in sentiment warn that the current price trend may soon reverse lower despite the fact traders remain netshort.

Technical Analysis

The S&P 500 is pressuring long-term rising support from March 2020 after negative RSI divergence preceded a cautious turn lower. A drop through this range could open the door to deeper losses given confirmation. Otherwise, resuming the uptrend would entail a push towards the midpoint of the Fibonacci extension at 3975.

S&P 500 Futures Daily Chart

S&P 500 Chart Created in Trading View

*IG Client Sentiment Charts and Positioning Data Used from March 3rd Report

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

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