S&P 500, Dow Jones outlook: retail traders sell before the Fed

Ahead of the Federal Reserve’s interest rate decision, retail traders have been slightly increasing short exposure in Wall Street benchmark stock indices. This can be seen by looking at IG Client Sentiment (IGCS). Short bets in the S&P 500 and Dow Jones have been on the rise in the near term. If this trend in positioning continues, then these indices could have more room to rise ahead.

S&P 500 sentiment outlook - bullish

The IGCS gauge shows that about 58% of retail traders are net-long the S&P 500. Since most traders are still biased to the upside, this suggests prices may continue falling. However, downside exposure has increased by 9.86% and 10.66% compared to yesterday and last week respectively. With that in mind, the combination of current and recent changes in positioning warns that the price trend may soon reverse higher.

S&P 500 futures daily chart

S&P 500 futures are continuing to trade within the boundaries of a Falling Wedge chart formation. While the wedge can be a bullish signal, the near-term trend may remain biased lower if prices continue trading within the boundaries of the formation. Positive RSI divergence is showing that downside momentum is fading, which can at times precede a turn higher. Still, a bearish Death Cross is present between the 50- and 200-day Simple Moving Averages. Downtrend resumption entails clearing the 4126 support point, exposing the May low at 4029. Pushing above the wedge exposes the March 3rd high at 4418.

Dow Jones sentiment outlook - bullish

The IGCS gauge shows that roughly 49% of retail traders are net-long the Dow Jones. Since most traders are now net-short, this hints that prices may continue rising. This is as downside exposure has increased by 30.71% and 18.73% compared yesterday and last week respectively. With that in mind, the combination of current and recent changes in positioning is offering a stronger bullish contrarian trading bias.

Dow Jones futures daily chart

Dow Jones futures are also trading within the boundaries of a Falling Wedge chart formation. A bearish Death Cross is in play between the 50- and 200-day SMAs as well, offering a downward technical cue. Positive RSI divergence does show that downside momentum is fading. Key resistance seems to be the 34002 inflection point before the wedge ceiling comes into play. Extending the downtrend would expose the 31951 – 32235 support zone, which is made up of late March 2021 lows.

Follow Daniel Dubrovsky on Twitter @ddubrovskyFX

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