Wall Street at risk as retail traders boost long exposure

In recent days, the S&P 500 and Dow Jones have been aiming cautiously lower, reversing some of the upside progress seen throughout March. This is as retail traders have been slowly increasing their upside exposure on Wall Street, as seen using the IG Client Sentiment (IGCS) indicator. The latter can at times function as a contrarian indicator. With that in mind, is there more pain in store for Wall Street ahead?

S&P 500 sentiment outlook - bearish

The IGCS gauge shows that about 52% of retail traders are net-long the S&P 500. Since the majority of them are biased to the upside, this hints that prices may continue falling. Over the past day and week, downside exposure has decreased by 6.1% and 14.7% respectively. Taking these into consideration, recent shifts in positioning are offering a stronger bearish contrarian trading bias.

S&P 500 futures daily chart

Taking a look at the daily chart, the S&P 500 could be carving out a bearish Head and Shoulders chart formation. The left shoulder has its beginnings from the summer of 2021, with the head peaking at the all-time high of 4808.25. Prices recently formed the right shoulder after finding a high of 4631 in March. Getting back to the neckline would place the focus on the 4101 – 4140 support zone.

Dow Jones sentiment outlook - bearish

The IGCS gauge shows that 46% of retail traders are net-long the Dow Jones. Since most traders are still biased to the downside, this is a sign that prices may continue rising. Upside exposure has fallen by 5.2% compared to the past 24 hours. This is as downside bets declined by 6.42% over the same time. With that in mind, it seems that the Dow may soon reverse lower despite most retail investors remining net-long.

Dow Jones futures daily chart

From a technical standpoint, Dow Jones futures may be vulnerable to further losses. Prices recently confirmed a bearish Evening Star candlestick pattern. Immediate support appears to be the 34002 inflection point. Clearing the latter then exposes the wide range of support between 32902 – 33623. Turning higher and closing above 35281 may open the door to revisiting the February peak at 35752.

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