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Article / 11 August 2017 at 13:11 GMT

Correction looms after S&P500 doubles key financial crisis level

Technical Analyst / Saxo Bank
Denmark
  • Technicals point to a correction in US stocks
  • S&P 500 hit 2.0 Fibonacci projection, or 200% of 'financial crisis bear market'
  • Last time it hit an important Fibo (the 1.618 projection) a 15% correction followed
  • RSI below the 40 indicates a bearish trend
  • Index could drop to support at 2,400 and 2,325 points, the latter being the stronger

New York Stock Exchange
New York Stock Exchange trading floor —  shown here on perhaps a calmer 
day than yesterday. Photo: Shutterstock


By Kim Cramer Larsson

The US stock market got hit hard on Thursday after a ride to new peaks. The Nasdaq, Dow Jones industrials and S&P 500 climbed to new record highs this week, but that ended abruptly yesterday as global markets spun into risk-off mode on fears of a conflict between the US and North Korea.

The selloff yesterday came after the S&P 500 hit the 2.0 Fibonacci projection, or 200% of the "financial crisis bear market".

The last time it hit an important Fibonacci level was when it reached the 1.618 projection (1.618 is also called the golden ratio) of the "financial crisis bear market", which caused a 15% correction (from Q3 2015 to Q2 2016 ). The market also reached the 2.0 projection of that correction.  

S&P 500 with moving averages and RSI
S&P 500 monthly Source: Saxo Bank

Short term there have been warning signs for some time, with the relative strength index (RSI) diverging and — if this is the peak — also the monthly (and weekly) charts indicating divergence on both the RSI and the moving average convergence divergence (MACD) indicator. 

Now the short-term rising trendline in the rising channel or wedge-like pattern is also broken, and the RSI is below the 40 threshold, which means it is indicating a bearish trend. Everything points to correction time, with a potential drop to support at 2,400 and 2,325 points, the latter being the strongest support.

For this bearish picture to be demolished a new high would be required.

S&P 500's rising channel is broken
S&P 500 Daily
Source: Saxo Bank


— Edited by John Acher

Kim Cramer Larsson is a technical analyst at Saxo Bank

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