Stock Market Outlook | Hell Arrives to the Markets – What Now?

Only two weeks ago I warned that things will get ugly and that the stock markets could be getting ready for a nasty sell-off this month – or as I put it “going to hell in a handbasket”.

Well back then it was just a probability. Now it’s official…

Yesterday the S&P 500 (ES), a leading US Stock index, closed below its 200 moving average. See chart below:

S&P (ES)

S&Ps break the 200 moving average support.

Why is this important?

The 200 moving average (shown in green) is used by a lot of funds to determine whether we are in a bull or bear market (i.e. a buyers or sellers market).

When the markets break that 200 moving average (MA) this triggers a lot of sell programs and often is the first sign of further selling pressure to come.

I must say that I was surprised by this move yesterday. Usually when markets reach the 200 MA they tend to at least bounce from there like Gold did last week (see below).

The FTSE UK 100 also reached its 200 MA yesterday but has not broken it yet.

So for now, my plan is to focus on shorting stocks, and any rallies this week back to 1390 or 1400 are “short” opportunities.

The next probable levels of support on the S&Ps (ES) are 1300 which is a psychological support and 1255 (which is a confluence of the October 2011 highs and the June 2012 lows).

Now let’s look at gold. The interesting thing about gold is that it has decoupled from the stock market (see chart):

Gold chart

Usually gold and stock market indexes are closely correlated. But this correlation has broken recently.

Gold is looking pretty strong and holding its own. You can see how it rallied from that 200 MA support. Any break above the 1740 level (shown by dashed red line and arrow) is an opportunity to load up.

Natural gas also had a nice pop higher this week and I am looking to see whether we can see this test its previous highs. Those of you who followed my plan to buy it at $3.6 should now be in profit.

Hope it helps. Good trading!

Alessio Rastani is a stock and forex trader at www.Leadingtrader.com

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