Danger Zone

After a pretty good rally from the December 24, 2018 lows, the markets may be in for a tough week as they enter the ‘danger zone’ of resistance.

During the slide from the October 2018 highs, the markets oscillated around the 2600-2650 or so levels. These numbers are not precise, but they’re close enough to be ‘big fat round numbers’ the market can latch on to. And many traders will likely be paying attention.

The last time the markets hit this danger zone, they rallied higher but failed. Ultimately, the markets dropped lower. This is a set-up for a test of this support/resistance level, as previous support, once breached, becomes resistance on the way back up.

Right now the sentiment in the market is delicate. While the beginning of 2019 has been a nice rally off the prior-year lows, the economic environment is quite uncertain. Fundamental data may say things are okay, but the market is still searching for bad news. And so far, all news is viewed with suspicion, and greeted with the benefit of the doubt.

You need to look no further than the 10-year treasury yield to see that markets are nervous. Theories about for how and why the US economy is actually in far worse shape than the data would indicate. What seems to be sorely lacking is the actual data that says we’re in for a major recession. You know what they say about self-fulfilling prophecies though?… Look hard enough and it will appear.

For this week, the market looks to be opening down, likely because of negative news out of China. But we also have the ongoing government shutdown and a few other data points the markets can muse about as well. So look for negative sentiment early on.

On the downside, look for 2535 as support for the SPX. On the upside, 2625ish should be the first tier of resistance. 2535 is simply last week’s opening price for the SPX. If we lose all of the gains from last week, expect some follow-through and more downside movement as markets like to re-test lows before sounding the all-clear. And if we really are entering a bear market, the probability of this re-test of high.

Should a breach of support occur we we’ll discuss things at that time. For now, even a week at a time looks to be a wild ride.

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