Very few people saw the United Kingdom’s decision to leave the European Union (EU) coming, and I’ll be the first to admit that I wasn’t one of them. The vote was an absolute shocker, and we saw that surprise reflected throughout the S&P 500 Index the two following days.
The S&P 500 fell as much as 5.75% to its lowest point on Monday, taking out support at 2,040 in the process. This was a level I had said the index must hold to maintain its short-term bullish trend, but given that the selling was spurred by an overreaction to an outside geopolitical event and not something that would affect the U.S. market over the long term, I wasn’t overly concerned about the breach as we quickly got the near-term bounce I was expecting.
Despite the violent swings, the S&P 500 has rallied more than 5% after bottoming out around 1,991. It also bounced back above 2,040, which ultimately keeps that support level intact.
If the S&P can hold above it over the next few days, it will be a very bullish sign that the panic is over. If not, the next key level will be Monday’s low of 1,991.
This second level of support must be held over the next week or it will indicate that Brexit is having a much deeper implication.
Another thing I want to point out is the Relative Strength Index (RSI), which is one of my favorite chart indicators.
A very valuable signal is when the RSI leaves oversold territory (a reading under 30) and crosses back into neutral zone, as it indicates that the stock or index is strengthening and a new trend is likely beginning. While the S&P 500 didn’t fall into oversold territory, it’s important to note that it did fall to 34 (its lowest reading since March) before bouncing this week. Since technical analysis is an art and not black and white, this action can still be considered bullish.
The next week should be very telling for us as we’ll likely find out where the index is headed as we begin the third quarter. Of course, there are plenty of factors that will influence the indices — earnings and the Federal Reserve top that list — but all in all I’m still bullish on the market’s trajectory between now and year-end and expect new highs in the coming months.
Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks, the ETF Bulletin and Co-Editor of Breakout Stocks.
