Market Analysis: Signs of Weakening Demand in the S&P

The S&P has been showing some interesting characteristics in recent weeks that warrant closer attention. We’re observing a notable shift in market dynamics, with supply increasing while demand has been decreasing. This combination is creating a setup that could lead to increased market volatility in the near term.

As we approach the previous high in the market, it becomes crucial to evaluate the quality of the demand we’re seeing. The concern here is that we may be looking at a lower high formation, which historically has been an indicator of increased volatility on the horizon.

What makes the current situation particularly noteworthy is the pattern of declining demand we’re witnessing. There are now two distinct areas where demand is clearly decreasing. In one area, the demand has remained more or less consistent throughout. However, in another location, we’re seeing what appears to be a local decrease – a temporary decline that may or may not persist.

Looking at the bigger picture, there’s a substantial drop in demand from the highest point to the lowest point we’ve measured. Following that decline, we’re now seeing demand decrease once again. While it’s true that markets can experience periods where demand decreases without major consequences, these patterns don’t typically persist indefinitely. Eventually, these decreases in demand tend to bring some kind of market reaction.

The pattern we’re currently observing appears to confirm this expectation. We’ve already seen what appears to be the largest reaction so far, which shouldn’t come as a surprise to those who have been watching the market closely. In previous analysis, there was anticipation of this exact reaction occurring, and the reason for that expectation was based on clear market signals.

The key evidence lies in a specific area where supply came into the market. When examining the volume in that region, there’s a slight increase relative to the surrounding areas. But what’s particularly telling is what happens next with price action. Over the course of five or six bars, the price essentially goes nowhere. It stalls out despite the presence of volume, which is a significant signal.

Adding to this picture, there are multiple days within this period where the price actually attempts to react downward. These repeated attempts at downward movement, combined with the stalling price action and the presence of supply, paint a picture of a market struggling to maintain its upward momentum.

The convergence of these factors – increasing supply, decreasing demand, stalling price action near previous highs, and repeated attempts at downward reactions – all point toward a market that may be approaching a period of increased volatility. While markets can certainly remain resilient in the face of such conditions, the quality of demand at these levels appears to be deteriorating, which is something that active market participants need to keep on their radar as we move forward.

Disclaimer: This content is for educational purposes only and should not be considered financial advice.