The S & P 500 is under pressure in the first few trading sessions of the second quarter as economic data continues to be strong and inflationary pressures remain elevated. As a result, the Fed might not be able to deliver on rate reductions currently priced into the market. Is this fundamental backdrop the whole reason for stock market weakness? I think there’s more to the story and the charts reveal what’s really going on. The stock market rally has been nothing short of amazing reflecting the strong underlying economy and strong earnings companies reported in Q1. But there comes a point where the party boat is just too packed and some of the party-goers need to be thrown overboard. To identify the technical position of the market we’re going to use Fibonacci retracements and extensions. I know this may be met with skepticism or even an eye roll to use voodoo analysis like this, but trust me, in my two decades as a professional trader and investor, I’ve seen these levels come into play enough that I will always pay attention to them. Whether they uncover some hidden order or structure to the markets or they are self-fulfilling prophecies, it doesn’t really matter to me because as I said, they’ve proven their worth to me. Fibonacci levels to watch In 2022, the S & P 500 dropped 1,327 points, or 27.5%. As the market recovered in 2023 recapturing the losses from 2022 the depth of the correction can be measured using Fibonacci retracements. The most famous Fibonacci retracement is the 61.8% level at 4,260. This didn’t do much to influence the market, but the next level surely did. Fibonacci analysis, named for the Italian mathematician, actually dates all the way back to ancient Greece with the philosopher Pythagoras in 570 BC. The main takeaway for investors is that square roots of important geometric ratios can detect some important market turning points. So if you take the square root of 61.8% retracement that calculates to be 78.6%. That was the turning point in the summer of ’23 high setting up the sharp sell-off into Q4 ’23. The market gathered itself, broke to new highs, and is now testing the next key Fibonacci extension level of 127.2% at S & P 5259. How is this calculated? Take the square root of the famous ‘golden ratio’ 1.618% and you’ll arrive at 127.2% extension. I know this sounds crazy to some. But so far the high in the market has been 5,265. Circling back, I believe the economy is strong, the Fed probably doesn’t have to cut rates more than one or twice and earnings in Q2 will be strong. But the market has rallied so sharply that we are technically overbought into this 127.2% extension and some sort of pullback is likely. I’m working on some hedges in our wealth management portfolios in preparation. If however this resistance zone does not reverse price, then the next extension level we’ll be targeting is the 1.618% at 5880. -Todd Gordon founder of Inside Edge Capital. We offer active portfolio management and financial planning – more information can be found here . DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
S&P 500 chart analysis shows pullback is likely and investors should hedge
Apr 2, 2024
