The S&P 500 has come under pressure in the first few trading days of the second quarter as economic data continues to be strong and inflationary pressures remain elevated. Therefore, the Fed may not be able to deliver the rate cuts currently priced in by the market. Is this fundamental backdrop the entire reason for stock market weakness? I think there’s more to the story and the chart reveals what’s really going on. The stock market’s rebound has been nothing short of stunning, reflecting a strong underlying economy and strong first-quarter earnings reported by companies. But at some point, the party boat becomes too crowded and some partygoers need to be thrown overboard. To determine the technical position of the market, we will use Fibonacci retracements and extensions. I know using voodoo analysis like this may be met with skepticism and even eye rolls, but trust me, in my two decades as a professional trader and investor, I’ve seen these levels play out enough to As for me I will always pay attention to them. Whether they reveal some hidden order or structure of the market or whether they are self-fulfilling prophecies is not important to me because, as I said, they have proven their worth to me. Fibonacci Levels to Watch In 2022, the S&P 500 fell 1,327 points, or 27.5%. As the market recovers in 2023, recovering losses from 2022, the depth of the correction can be measured using Fibonacci retracements. The most famous Fibonacci retracement level is the 61.8% level of 4,260 points. This didn’t have much of an impact on the market, but the next phase certainly will. Fibonacci analysis is named after the Italian mathematician and actually dates back to the ancient Greek philosopher Pythagoras in 570 BC. The key takeaway for investors is that the square roots of important geometric ratios can uncover some important market turning points. Therefore, if you take the square root of the 61.8% retracement, the result is 78.6%. This was the turning point from the summer high of ’23, triggering the sharp sell-off in Q4’23. The market has gathered itself to break new highs and is now testing the next key Fibonacci extension level of 127.2% on the S&P 5259. How is this calculated? Taking the square root of the famous “golden ratio” of 1.618%, you get an expansion of 127.2%. I know this sounds crazy to some people. But so far, the market’s highest point has reached 5,265 points. Looking back, I believe the economy is strong, the Fed may not have to cut interest rates more than once or twice, and second-quarter earnings will be strong. But the market rebounded so quickly that we are technically overbought to the 127.2% extension and some kind of pullback is likely. I’m preparing to do some hedging in our wealth management portfolio. However, if this resistance area does not reverse the price, then our next extension target is 1.618% of 5880 levels. -Todd Gordon Founder of Inside Edge Capital. We offer active portfolio management and financial planning – more information can be found here. Disclosure: (None) The above is subject to our Terms and Conditions and Privacy Policy. This content is for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above may not apply to your particular situation. Before making any financial decisions, you should strongly consider seeking advice from your own financial or investment advisor. Click here to view the complete disclaimer.
