If The Market Sells Off, Should You Blame D.C. Or This Trendline?

If the stock market sells off soon, people will start to blame D.C. (Congress) and they will be partially right. If the government stays shut down for a long-time, there will be negative consequences, but worse, if congress fails to raise the arbitrary debt-ceiling (or should I say default ceiling?), than the US will be forced to enter into technical default. Even if the US treasury is able to somehow find a short-term or long-term solution (like payment prioritization, or Minting of Platinum Coins/Issuing of High-Coupon Bonds), markets might not like it (because let’s not kid ourselves, they are ALL non-standard options even if you think they are beneficial either short or long-term) and sell-off nonetheless.

But D.C. might not be THE reason for the sell-off, although it might get all the credit for it. So should you blame D.C. for a potential market sell-off or do market technicals come into play here as well?

The Chart

Below is a weekly chart of the SPDR S&P 500 ETF. As you see, over the past few years, the market has been on a tear with only really one correction along the way. There have been a few pullbacks and each pullback has been a buying opportunity. This year, the market has had another nice run, but over the past few months, each new high has only been marginally higher. While this is not utterly bearish, this is also not the most bullish sign. As you see, there has been a negative divergence in the RSI (the pink line on the bottom). Each new high in the market has registered a lower RSI reading.

But what I’m watching the most is the trendline that has been established and held a few times over the past year. If this breaks, we could see some technical selling, triggering a 5-10% market sell-off down to around the 50 week moving average. The “QE3 top” might be formed.

So while D.C. might get all the blame for the market sell-off, the underlying cause might actually be the trendline below.

SPY weekly


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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