Wall Street at Risk as Retail Traders Still Buy the Dip

S&P 500, Dow Jones, Retail Trader Positioning, Technical Analysis – IGCS Wall Street Update

• Retail traders continue to buy the dip on Wall Street
• From a contrarian perspective, this might be a mistake
• Will the S&P 500 and Dow Jones continue downward?

At 6 days in a row, the S&P 500’s losing streak as of Tuesday was the longest since February 2020. That was when global markets were selling off aggressively amid the onset of lockdowns triggered by Covid-19. The Dow Jones also sank for 6 consecutive days, which was the longest since May.

Despite these losses, IG Client Sentiment (IGCS) has been showing that retail traders have been increasingly buying the dip. IGCS tends to function as a contrarian indicator, especially in trending markets. With that in mind, is there more room for Wall Street to dip in the coming sessions?

S&P 500 Sentiment Outlook – Bearish

The IGCS gauge shows that about 61.67% of retail traders are net-long the S&P 500. Since most of them are biased to the upside, this suggests that prices may continue falling. This is as long bets increased by 2.04% and 19.12% compared to yesterday and last week, respectively. With that in mind, the combination of current and recent changes in sentiment is offering a stronger bearish contrarian trading bias.

S&P 500 Daily Chart

On the daily chart, S&P 500 futures have left behind a Long-Legged Doji candlestick pattern as prices failed to breach the 3639 – 3671 support zone. This is a sign of indecision. A turn higher is possible. Still, in such an outcome, a bearish Death Cross between the 20- and 50-day Simple Moving Averages (SMAs) provides a downward bias. The 20-day line could kick in as resistance, maintaining the downtrend. Extending losses then places the focus on the 3541 – 3587 inflection zone. The latter has its beginnings in September 2020.

Chart Created in Trading View

Dow Jones Sentiment Outlook – Bearish

The IGCS gauge shows that about 71% of retail traders are net-long the Dow Jones. Since most of them are biased to the upside, this hints that prices may continue falling. Long positioning has increased by 1.19% and 12.02% compared to yesterday and last week, respectively. With that in mind, the combination of current and recent changes in sentiment is offering a stronger bearish contrarian trading bias.

Dow Jones Daily Chart

On the daily chart, Dow Jones futures have confirmed a breakout under the critical 29552 – 29869 support zone. That has opened the door to extending the dominant downtrend. A bearish Death Cross between the 20- and 50-day SMAs remains. As such, if prices turn higher, these lines could hold as resistance, maintaining the downward focus. Immediate support appears to be the 123.6% Fibonacci extension at 28746.

Chart Created in Trading View

*IG Client Sentiment Charts and Positioning Data Used from September 27th Report

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

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