The S&P 500 is currently down 6.26 percent from the record high of 2939 clocked earlier this month and could suffer a deeper drop if the bulls fail to defend the key support of 50-week EMA.

Weekly chart

As can be seen, the 50-week EMA has been put to test six times in the last 28 months. More importantly, five out six times, the bulls managed to avoid a weekly close above that EMA support.

Hence, the 50-week EMA is a crucial support, which if breached on a weekly closing basis, could yield a deeper drop toward 2532 (February low).

The 5-week and 10-week EMAs generated a bear cross two weeks ago and are currently trending south in favor of the bears. Further, the relative strength index (RSI) is bearish below 50.00 and the MACD is signaling that bearish move is gathering steam.

As a result, there is a strong probability that the index will find acceptance below the 50-week EMA of 2733.

Stepping back

The index closed below the EMA support in October 2016 but quickly regained pose in the following weeks, trapping the bears on the wrong side of the market, largely due to "China reflation" and "Trumpflation" story.

Back then, the Fed was raising rates at a snail's pace. The lift-off happened in December 2015 and the second rate hike was delivered in December 2016.

This time it is different

A close below the 50-week EMA could prove costly this time considering the fact that the US and China are heading for a lose-lose situation in a trade war and the Fed policymakers are toying with the idea of above-neutral rates (restrictive rates).

Further, there is no China reflation story to save the day for bulls. In fact, China's growth slowed to 6.5 percent in the year to the third quarter, the slowest rate since the global financial crisis.

View

S&P 500 will likely find acceptance under the 50-week EMA in the near-term, following which it could drop to 2532 (February low). The bearish case would weaken if the index closes on Friday above the last week's high of 2816.

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