S&P 500 poised for higher volatility as earnings season ends

<p>As the tail end of corporate earnings season approaches for the US equities markets, the S&P 500 has continued to trade in a tight but […]</p>

As the tail end of corporate earnings season approaches for the US equities markets, the S&P 500 has continued to trade in a tight but choppy fashion, straddling its flat and closely-situated 200-day and 50-day moving averages.

Despite a summer that has had its fair share of macro-driven volatility triggers, including the Greek debt crisis, continuing drama over the timing of a Fed rate hike, the widespread commodities plunge, and China’s equity nosedive and devaluation of its currency, the S&P 500 has managed to remain relatively buoyant and is currently trading around where it began the summer.

SP500 Daily Chart

 

In fact, since February, the benchmark index of US equities can clearly be seen to have been trading within a large trading range with the 2035 price area as its support base. Within the course of this range, of course, the index reached a new all-time high of 2134 in May. That high was the latest culmination of a prolonged bullish trend that has been in place for more than six years.

As earnings season and the summer comes to a close, however, the market’s attention should once again be focused on pressing macro concerns, most notably Fed monetary policy tightening and China’s turbulent financial and economic environment. These and other fundamental conditions could lead to a breakout of the current volatility squeeze.

This volatility breakout could likely pressure the S&P 500 to the downside towards the noted 2035 support base, the low of the current trading range that was last revisited in early July. Even a move of this magnitude, however, would only constitute a pullback of less than 5% from May’s all-time high, far from what might be deemed a correction. On any further breakdown below that 2035 support area, the index could likely drop towards its next major downside support target around the 1975 level, which was last hit in early February.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.