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S&P 500: will tech sell-off lead to broader stocks meltdown?

After Nasdaq 100’s big drop on Friday, we are watching the broader S&P 500 index for any signs of weakness in US equity markets at the start of this new trading week. So far we haven’t seen anything too bearish. But with technology sector having been the leader, Friday’s sell-off is definitely a worrying sign for the stock markets. Any further sharp falls here could spook the wider equity markets and lead to a full-blown sell-off across the major global indices. This in turn could, for example, underpin safe haven assets like gold and silver and undermine risk-sensitive FX pairs such as the USD/JPY and USD/CHF.

Friday’s sell-off did cause some technical damage to the S&P 500. The index’s failed attempt to break to a new high above 2440 means we may have seen a false break reversal pattern there. This pattern clearly shows that the buyers were unwilling to bid the markets any higher on Friday. If this was the turning point, then the S&P shouldn’t be able to get anywhere near this level again: for if it does then one could conclude that the selling pressure is not really that strong. Indeed, a closing break above 2428, Thursday’s low, would raise serious question marks about this potential bearish pattern.

Given the past strength of the rally, the sellers would want to see the breakdown of further support levels now, starting with the pivotal 2416 handle. This level was previously resistance and turned into support on Friday. Thus a clean break below here would suggest the selling is not done yet.

Conversely and as mentioned above a closing break above 2428 would be bullish. The bearish case would become completely invalid if the index were to break above 2440. In this case, I wouldn’t be surprised to see repeated all-time highs again until we reach levels such as 2460 and 2485. 

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