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The S&P 500 dropped on Wednesday following losses in the energy sector, uncertainty in Greece, and some negative comments from the Federal Reserve.
The CBOE Volatility Index jumped by the most this year (19%) to move past the 20 level as stock market losses intensified in the last couple of hours of US trading.
Energy shares were a sea of red as crude oil futures fell back below $45 a barrel and stocks made no progress despite reassuring profit numbers out of Apple and Boeing Co.
Apple shares opened sharply higher after the company reported record profits of $18 billion for the fourth quarter. However, the stock pared gains and finished the session higher by under 6% as broader markets fell back. Boeing also surprised analysts with higher profits and this saw the company advance by 5.4%.
The most worrying aspect behind the selloff was that the S&P 500 seemed to give up in the last couple of hours and comments from the Federal Reserve – for once – did little to reassure markets. Alongside uncertainty coming from the new Greek government, markets may be looking at more volatility ahead.
Technicals & Outlook
Despite the disappointing day’s returns, it was a good day for technical traders who were short and looking at the key levels. In fact, the S&P 500 moved nicely through the pivot in early trade and closed on the second support, right on the 2,000 level.
Looking ahead, we continue to be bearish on the index over the next few days but note that there is a medium risk of a trend reversal. That’s because there two potential scenarios in opposite directions. The first scenario is a potential head and shoulders pattern, this pattern is bearish. The rally to 2064 was the second shoulders, a break below the neckline at 1992 would complete the pattern. In this case the index would decline further, the next target is 1900-1920.
The second scenario is a running triangle (blue labels) [A,B,C,D,E]. This pattern is bullish and as you can see on the chart, today’s decline near 2000 completes wave E which is the final wave down. If the pattern is a triangle the S&P 500 is at the start of a long rally. The 200-day moving average is below at 1974, this would be the immediate target in the event of a break below 1992.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
