The S&P 500 index has been under pressure in the first few sessions of the second quarter as economic data continues to be strong and inflation pressures remain high. As a result, the Fed may not be able to cut interest rates as currently priced in the market. Is this underlying background the entire reason for the stock market downturn? I think there's more to the story and the charts reveal what's really going on. The stock market rally has been nothing short of amazing, reflecting the strong underlying economy and strong corporate earnings reported in the first quarter. However, there comes a point when the party ship becomes full and some of the partygoers must be thrown overboard. Use Fibonacci retracements and extensions to identify technical positions in the market. I know that using voodoo analysis like this may be met with skepticism or eye-rolling, but believe me, as a professional trader and investor, In 20 years I've seen these levels work well enough so I'm always going to pay attention to them. It doesn't really matter to me whether they reveal the hidden order and structure of the market or whether they are self-fulfilling prophecies. 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%. The depth of the correction can be measured using Fibonacci retracements, as the market recouped losses from 2022 and recovered in 2023. The most famous Fibonacci retracement is the 61.8% level at 4,260. This didn't have a huge impact on the market, but it certainly did at the next level. Fibonacci analysis, named after the Italian mathematician, actually dates back to ancient Greece with the philosopher Pythagoras in 570 BC. The main takeaway for investors is that important turning points in the market can be detected by the square root of important geometric ratios. Therefore, taking the square root of the 61.8% retracement yields 78.6%. That was the turning point for the summer high of 2023, and the start of a sharp decline towards the fourth quarter of 2023. The market has calmed down, made new highs, and is currently testing the next important Fibonacci extension level on the S&P 5259 at 127.2%. How is this calculated? If we take the square root of the famous “golden ratio” of 1.618%, we get an expansion of 127.2%. I know this sounds crazy to some people. But the market high so far is 5,265. Getting back to that, I think the economy is strong, the Fed probably won't need to cut rates more than once or twice, and second quarter earnings will be strong. However, since the market has rallied so sharply, technically this 127.2% extension is overbought and some kind of rebound could occur. I am preparing to incorporate some hedges into my wealth management portfolio. However, if this resistance zone does not reverse the price, the next expansion level we will target is 1.618% of 5880. -Todd Gordon, Founder of Inside Edge Capital. We provide active portfolio management and financial planning. Learn more about. Disclosure: (none) The above is subject to our Terms of Use and Privacy Policy. This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any securities or other financial assets. The content is general in nature and does not reflect your unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor. Click here for full disclaimer.
