S&P 500 Chart Foretells A Bearish October…
Does This S&P 500 Chart Foretell Another Stock Downturn?
Last week’s Federal Reserve meeting did little to soothe stock market anxiety…
In fact, major indices dropped sharply last Friday as investors tried to decipher the US central bank’s Thursday decision to keep interest rates at 0%. Making matters worse, stocks traded sideways in a volatile fashion yesterday as indecision ruled the day.
Why are stocks acting so poorly?
Much of the recent equity bearishness has to do with the looming onset of higher interest rates. According to Fed Chairwoman Janet Yellen, the US economy is doing well and higher rates are coming soon.
However, the Fed chose not to raise rates in September since there’s still a distinct risk of a US slowdown due to global economic weakness.
Of course, most of the global weakness worries stem from China. Recent economic data from the world’s second largest economy reveals a sharp slowdown in manufacturing and export activity.
While these fundamental factors are certainly having an impact on market sentiment, it’s a technical development that really has me sitting up in my chair…
As you can see, investors made a valiant attempt to rally the S&P 500 above 2,000 last week- an important psychological level.
But it didn’t work…
The closely watched market index reversed sharply lower by the end of last week, leaving a foreboding reversal bar on the weekly chart.
Here’s the deal- should the S&P 500 break below 1,950 in coming days (the low of last week’s bar), there’s a very good chance the index retests the 1,875 area (red line) last seen in August.
And get this…
If data arrives supporting the idea China’s economy is actually worse off than expected, a test of the October 2014 lows at 1,825 (green line) isn’t out of the question.
As a result, we could be on the cusp of a 7-8% downturn in the S&P 500.
And remember, we’re smack dab in the middle of a historically bearish period for the markets. September and October are typically the weakest months of the year for stocks.
What would such a bearish move in the S&P 500 do for gold?
As I’ve mentioned before, gold is typically seen as a flight to safety asset in times of extreme market uncertainty. While the metal saw firm upside as stocks plummeted in August, the yellow metal has failed to impress the past few weeks.
But that may soon change…
Notice how gold has failed to make a new low in September. When a market fails to set a new low after a long downtrend, it’s a good sign selling momentum is waning.
You’ll also notice how the metal is on the verge of breaking above an important downtrend line near $1,150 an ounce. Should gold rally above this technical resistance level, a rush to higher prices may ensue as short sellers buy back their positions.
Bottom line…
The past few days have been highly indecisive and volatile in the S&P 500. But if the index breaks below 1,950 in coming days, there’s a very good chance of another sharp downturn in stocks.
Such a situation may provide the bullish environment needed to push gold above technical resistance at $1,150 and onto higher prices.
Remember, there are some great options for trading the yellow metal via gold ETFs.
Until Next Time,
Justin Bennett
BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.
Category: Commodity Trading
