I just lately posted a video on 4 potential paths for the S&P 500, from the very bullish (S&P will get over 4800 within the subsequent six weeks) to the very bearish (S&P breaks beneath 4000). Immediately, I wished to dig slightly deeper into utilizing Fibonacci retracements to establish potential draw back targets and focus on why 3800 could turn out to be an eventual low for the S&P 500 index.
Fibonacci retracements are a little bit of a subjective measure. Whereas there is no such thing as a actual wiggle room within the values used within the calculations (61.8%, 38.2%, and many others.), there may be loads of subjectivity when it comes to which ranges you assign as 0% and 100%. In my latest notes on the S&P 500, I have been utilizing the September 2020 low and the January 2022 excessive as the value extremes. This leads to a 38.2% retracement degree proper round 4200. That is proper, the 4200 we simply barely reached earlier this week.
The overall method to Fibonacci evaluation is that you simply anticipate help on the first degree. If and when that degree is breached, you utilize the following degree as your new goal. So that might imply that, if 4200 is damaged on a closing foundation, the following draw back value goal could be the 50% retracement degree round 4000. If 4000 would fail to carry, then the following draw back goal for the S&P 500 could be round 3800, which might signify a 61.8% retracement of the September 2020 to January 2022 rally.
However what if we use the March 2020 low as an alternative of the September 2020 low because the 0% degree? Now we’re wanting on the entirety of the 2020-2022 bull market part. Utilizing these new excessive ranges, we arrive at a 38.2% retracement degree proper round 3800. That is virtually an identical to the 61.8% degree we talked about earlier. 3800 would additionally signify a drawdown of simply over 20% off the January peak at 4800 and would imply the S&P could be dangerously near the dreaded “bear market” degree.
With the rally into Friday’s shut this week, many will probably be speculating that that is yet one more “purchase on the dip” second amongst many we have seen throughout this bull market part. However deeper and extra painful corrections often appear to be this simply earlier than issues begin to get actually ugly. Is it the most definitely state of affairs? Maybe. Is it a really actual risk? Completely. And aware traders all the time think about all of the potential outcomes!
Wish to see extra on 4 potential future paths for the S&P 500 index, and what they might imply to your portfolio? Try my YouTube channel!
P.S. Able to improve your funding course of? Try my free course on behavioral investing!
David Keller, CMT
Chief Market Strategist
Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your personal private and monetary state of affairs, or with out consulting a monetary skilled.
The writer doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the writer, and don’t in any means signify the views or opinions of another individual or entity.
David Keller, CMT is Chief Market Strategist at StockCharts.com, the place he helps traders decrease behavioral biases via technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness methods to investor choice making in his weblog, The Conscious Investor.
David can also be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency centered on managing threat via market consciousness. He combines the strengths of technical evaluation, behavioral finance, and knowledge visualization to establish funding alternatives and enrich relationships between advisors and purchasers.