With the S & P 500 enduring a few sharp declines recently, today we’ll review three key technical indicators that we’re keeping a close eye on for potential warning signs of a bigger downturn. We’ll be discussing two-way volatility, comparing the index’s recent pullback to prior drawdowns the last few months, and breaking down the MACD indicator (which is now flashing a sell signal). Two-Way Volatility has Returned One of the key characteristics of an uptrend is low volatility. We track this by monitoring the number of absolute 1% daily moves for the S & P 500 on a rolling monthly basis. Conditions have remained historically calm since April, with only one month — October — registering more than four absolute 1% moves. Last month saw three gains and two losses of at least 1%. After Tuesday’s additional 1% decline, we now have six absolute 1% moves in less than four weeks. Needless to say, that’s the most in any four-week span since April. While such ultra-calm trading conditions were bound to change eventually, clusters of large moves like this often raise the question: is this simply a brief shakeout, or the beginning of a broader shift toward a higher-volatility environment? We can see this clearly on the chart, which plots all the ±1% daily moves since the key higher low on April 21 this year. That period began with three consecutive 1% gains following a sharp 1% loss — a sequence that helped ignite the persistent uptrend we’ve seen since. As the chart shows, there have been far fewer 1% moves since then, and hardly any 1% declines until just the past few weeks. Now, however the cluster of six ±1% moves since the sharp 3% drop on October 10 has materialized. Also, every 1% decline since April 21 was followed by at least one 1% gain within a few days — evidence that buyers consistently stepped in after any meaningful dip. This time, though, the pattern has shifted. We’ve had two 1% declines in just the past four days, while the two interim gains (Friday and Monday) were minor, at only +0.30% and +0.20%, respectively. Could we see another strong rebound, consistent with the prior buy-the-dip behavior? Possibly — but this recent cluster of volatility marks a clear change of character from what had been a remarkably steady and low-volatility advance. Short-term Pullbacks Zooming in to the two-hour timeframe, the current pullback now totals about 2.3% from the recent high — roughly in line with the prior drawdowns we’ve seen since August. The largest of those was a 3.5% decline from the late-July high to the August 1 low, with several other pullbacks in the 2–3% range since then. Tuesday’s downturn also pulled the short-term 14-period RSI closer to oversold territory. Reaching that level would hardly be surprising. In fact, sell-offs into oversold conditions on the two-hour chart have consistently marked buying opportunities — with traders stepping in on each of the past five occurrences. The key now is whether they’ll respond similarly again this time. The Latest MACD Sell Signal All of this has forced the MACD indicator to trigger a sell signal. This happens when the indicator’s faster (black) line crosses under the slower (red) line while both lines are above the zero level. As we know, there have been more than a handful of MACD sell signals since May — nine through early October — and none of them correctly foreshadowed a larger downturn. In fact, each has proven to be a false alarm, as slowdowns in momentum have consistently led to new buying opportunities (as indicated by the blue, dotted vertical lines). That said, we’ll know it when this dynamic changes. The last three successful MACD sell signals led to meaningful pullbacks, going back to July 2024, with the most notable one occurring near the February peak earlier this year. From that perspective, a sell signal that actually follows through with additional downside feels overdue at this point. Even if the broader uptrend remains intact, a drawdown of more than 3.5% from the highs is inevitable — it’s just a matter of whether that happens now or later in the near term. The bottom line is if the market’s character truly is changing, we’ll see it reflected in these three technical indicators. — Frank Cappelleri Founder: https://cappthesis.com DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
Charts show recent volatility marks change of character from steady advance
