The U.K. surprised nearly the entire world on June 23 by voting in favor of an EU “Brexit,” a move that certainly sent shock waves through global markets. The Friday after the vote, the SPDR S&P 500 ETF Trust (NYSE: SPY) plummeted 4.0%, and the market seemed to believe that the world was on the brink of some major economic catastrophe.
After the sell-off continued on Monday, the S&P 500 has now logged a significant bounce as investors seem to be stepping in and buying the dip. But are the “buy the dip” buyers as premature as the “sell the news” sellers? Here’s a look at what the charts are saying.
It may have been a bumpy ride since the Brexit vote, but a look at a chart of the S&P 500 shows that no major technical damage has been done at this point. In fact, for such a shocking piece of news with extremely negative implications, the trading volume on the two days following the vote was relatively light.
The S&P 500 hasn’t made a new high in over a year now. While some technical analysts interpret the market’s lower high in November and lower low in February as a sign that a bear market has begun, others argue that the S&P 500 has simply been trading in a sideways range between roughly 1810 and 2135 for the past year. Trading has been volatile, but without a major, sustained drop, the market could simply be consolidating prior to another leg higher.
It will take some time to determine what exactly the Brexit will mean for the U.S. economy on a fundamental basis. However, from a technical standpoint, if the Brexit dip is now over, the news may end up being the trigger for the resumption of the bull market. It’s open to interpretation whether or not June’s high of 2120 was significantly higher than November’s 2116 high.
However, if the post Brexit dip stays well above the previous low of 1810, it could be a bullish sign that the next upswing will push above 2120.
Any dip below 1810 would be bad news for traders who are hoping to avoid a major long-term market downturn. In fact, significant support below 1810 may not come until the 1550-1575 level that represented the highs prior to the Financial Crisis and the bursting of the Dot Com Bubble.
On the other hand, a move above 2020 would shift traders’ attention squarely on the S&P 500’s all-time high of 2134 that has stood now for more than a year. A new all-time high could mean the beginning of the next major leg of the seven-year bull market.
Disclosure: the author has no position in the stocks mentioned.
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