Something Is Going On… Oh! Never Mind

A day after the historic British referendum regarding her continued membership in EU, on Friday June 24th 2016, the S&P 500 plunged -75.91 points or -3.6%. The next day, i.e. Monday June 27th, S&P 500 lost 36.87 points more or -1.8%.

So, the net result two days after the upheaval in Europe was that S&P 500 shed 112.78 points or 5.3%. See the daily chart to notice the damage done.

The post-Brexit news and analysis was not looking good for the market and after two big days of decline it was natural for people to get scared and run for the cover. However that is not what happened and markets around the globe rebounded on Tuesday and Wednesday.

Once market participants digested the initial shock of the Brexit vote, they started to analyze it and came to a conclusion that even though the referendum does create uncertainty, it is too early to commit firmly one way or other as there are still many unknowns including a slim chance that the Brexit may not happen at all. So, the profit takers and bottom-feeders came and S&P 500 gained 35.55 points on Tuesday and 34.38 points on Wednesday.

Here is the weekly chart of S&P 500. What is clear from this is that post-Berxit decline in S&P 500 has not made a significant damage to the chart.

For the last two years, the index has fluctuated within a trading range. It first entered this range in May 2014 and the lower bound is between 1820 & 800 and the upper bound is between 2120 & 2134. After, four days of down-then-up gyration, the index is still within the mid-range of this trading zone.

Even more, due to two big loss days followed by two big gain days, the S&P 500 is in the process of making a two-candlestick Bullish-Engulfing pattern on weekly timeframe. If the week ends like this, then it will suggest that there is still a good chance that the index will challenge its all time high of 2134.72, but a lot depends upon what the policy makers and politicians do in the U.K. and the E.U.

The index is also at a critical resistance level. During the decline, the S&P 500 futures bounced up to 2064.75 at 10:00 AM on Friday. It is acting as a resistance. Wednesday’s market action has brought the price to this level but it has not cleared it convincingly. The futures declined by -87.25 on Friday and by -33.50 on Monday, for a total decline of -120.75. The futures gained +43.50 on Tuesday and +38.25 on Wednesday, for a total of +81.75. The retracement is two-thirds of the decline.

Though, we are of the opinion that the net impact of Brexit is going to be negative for the global economy in general and the U.K. and E.U. economies in particular, the S&P 500 chart is not indicating that its collapse is imminent. The real danger will start once the index breaks below the lower bound, as it did in 2008 (see attached chart), till then we should follow the price action, which, at the moment, is strongly dependent upon politics and response by policy-makers to counter the waves created by the Brexit.