S&P 500 Analysis: I Know What You Did Last Summer

A more technical look at the markets from InterTrader

After a drop at the end of May that sent the S&P 500 back to the December 2011 highs, the US index moved higher and is currently trading in a tight range between 1.330-1.375.

To this writer, the risk is clearly to the downside given that:

• The US economy is continuing to weaken
• Corporate earnings are showing clear signs of strain
• The Eurozone debt crisis is still raging

Despite the fact that investors are looking for glimmers of hope and mainly waiting for the arrival of the next round of quantitative easing, it is rather unlikely that the US central bank will intervene in the near term. This leaves the market at risk of a further correction.

If we take into consideration what happened last summer, there are quite a few similarities.





In both cases, the market rallied in June, following a May decline, leading to sloppy sideways trading in July.

The major sell signal was triggered on 4 August 2011, when the market started to freefall.

With the current fundamental and technical setup showing a downward trending market, the S&P 500 index could soon re-test June lows in the 1.273 area, if not set new lows in August.

Should those lows coincide with further weakness in the economy, that would provide the Fed with grounds to launch a third QE.

If, however, the Fed acts earlier, we should consider adding equity exposure back into our portfolios.


Good luck and happy trading

Dafni Sedari, InterTrader

(Original article written 26 July 2012).