S&P 500 gives alarm signal: index can fall by more than 16%

The S&P 500 shows a striking warning signal that preceded sharp stock market declines in the past. According to a new technical analysis, the US stock market index is losing strength, despite the increases in recent months.

If the same pattern repeats, Wall Street may face a hefty correction. Concerns about the US stock market are also increasing at large investment banks.

According to stock market analyst TradingShot, the S&P 500 shows a pattern that has been followed twice in the past by a sharp price decline. The analyst shared his findings on 30 October via TradingView.

This is a so-called negative divergence. In addition, the stock market index continues to rise, while the strength behind that rise is actually decreasing.

This can be seen in the Relative Strength Index (RSI), an indicator that shows how strong a price movement is. Since the end of May, the S&P 500 has been reaching higher and higher levels, but the RSI has been showing lower peaks. That may be a sign that the increase is losing its strength.

According to TradingShot, a similar pattern was also visible in two previous stock market corrections.

After the corona crash of March 2020, the S&P 500 initially rose by more than 119 percent. This was followed by a decrease of about 27 percent. Something similar also occurred in a later period. The index then rose by more than 76 percent, before a correction of about 21 percent followed in 2025.

In the current rise period, the S&P 500 has gained about 62 percent from its previous low. Now that the same warning signal appears again, TradingShot takes a new correction into account.

According to TradingShot, the S&P 500 could lose a lot of ground in the coming months. In the most negative scenario, the analyst foresees a drop to around 6,350 points.

From the closing position of Friday 30 October, when the index was around 7,580 points, this would amount to a loss of more than 16 percent.

But such a large decline is not self-evident. TradingShot also takes into account a more limited correction towards 6,900 points, about 9 percent below Friday's closing position. Around that level is the average of the past hundred weeks, which may offer support.

According to the analyst, which direction it goes depends mainly on economic and political developments.

In previous major stock market declines, there was more than just a technical warning signal. In 2022, stocks were under pressure due to high inflation and sharp interest rate hikes. In 2025, rising trade tensions between the United States and China caused unrest.

If a similar setback does not occur this time, TradingShot considers a smaller drop towards 6,900 points more likely than a drop to 6,350 points.

Not only technical indicators indicate possible problems for the S&P 500. The performance of the companies within the index also give cause for caution.

For example, about 62 percent of the companies in the S&P 500 are below the average of the past fifty trading days. This means that many stocks are doing less well than the rise in the stock market index suggests.

The large technology companies, in particular, are keeping the index going. The so-called Magnificent Seven, including Apple, Microsoft and Nvidia, account for a large part of the expected profit growth.

Analysts expect profit growth of more than thirty percent for these seven companies. For the other companies in the S&P 500, that expectation is around five percent.

This makes the American stock market highly dependent on a small group of companies. If investors lose confidence in the huge investments in artificial intelligence (AI), these stocks can come under a lot of pressure.

Rising US government interest rates and the midterm elections on Tuesday 3 November are also causing uncertainty.

Morgan Stanley also takes a stock market correction into account. According to the bank, the S&P 500 can fall about eight percent in the short term, towards 7,100 points.

That is a less negative scenario than the decline to 6,350 points outlined by TradingShot. Morgan Stanley also expects the index to recover afterwards, possibly to 8,000 points.

In the coming days, the US elections, new economic figures and developments around major technology companies in particular could cause movement on Wall Street.