The last seven days have been rough for investors. Throughout the week, the S&P 500 index dropped almost 5%. Today, it is trading back at levels not seen since early June.
A shallow drop, like the current one, is usually bought by investors. However, this article outlines why the index could drop more and possibly experience a drawdown of up to 11% from its summer high.
Why did the S&P 500 fall?
The Federal Reserve has clarified that it intends to maintain higher interest rates for an extended period, with significant rate cuts not anticipated until 2025. This announcement prompted the US 10-year government bond yield to reach a pinnacle of 4.5%, marking the highest level since October 2007 and breaking new ground for 2023. Technical analysis also suggests that the markets have their aim on the 5% level.
High interest rates make bonds more attractive than stocks and typically result in an economic slowdown. In this cycle, real estate has emerged as one of the most significant sectors to bear the brunt of this impact.
Furthermore, it's noteworthy that the Federal Reserve has historically been slow to adjust interest rates, with the economy and stocks taking a beating. There is no reason not to expect the same outcome once more.
What are the charts saying?
The S&P 500 triggered a 102-day head and shoulders pattern as the market closed on 21 September. This week, the decline has slowed, and we might see a strong bullish upward movement. However, as long as the index trades below the September high of 4543.6, then there is no doubt that the H&S pattern will remain active, suggesting a price drop to approximately 4068.
How will you trade the S&P 500?
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