The message coming into the week was that SPX was displaying some general weakness and more possible downside was on the way. The theme of last week was to ‘sell the rip’ and today we saw that on full display.

SPX gapped up over 50 points early this morning and then gave it all up and closed in the red, posting nearly a 72 point reversal. This was truly a ‘sell the rip’ moment. Upside price action has been failing to sustain all of last week and that is how this week is kicking off as well.

The daily chart is actually quite bearish despite us not breaking Friday’s low today. The candle is nearly a textbook perfect bearish engulfing candle – at the very least, it is engulfing the entire body of the last candle. SPX closed nearly at the lows of the day on the back of a major downside reversal. The working theory is that the downside likely continues into tomorrow.

If SPX does break down further tomorrow, then 7420 will become the important key level. This level was tagged as the low a couple of times in the past few weeks and SPX has managed to bounce from it each of the previous times. If it fails to hold this time, then we are likely to see sell side activity accelerate.

I have marked the 7420 area with a grey box on the chart below, which is a zoomed view of the past few weeks. We can see that box has held 3 times in the month of July.

It looks quite scary below that box. Personally, I don’t see any levels on the chart until the lower end of the expected move if the box breaks. We’ll see if there is a point at which dip buyers step in, but right now rip sellers are winning.

7420 is the only level that really matters tomorrow. If there is an upside push, then 7515 could potentially be something to watch for as well.

Good luck!