Understanding the relationship between stocks and correlated markets can provide insights into coming rallies or corrections. In this case, I believe they are warning of a potential slow down.
Regarding the stock market, it’s important to keep an eye on the Volatility Index (VIX), which is seen at very low levels. This means investors are not worried about a potential drop in stock prices.
But we know that the market moves in cycles so when there is no fear, it may suggest that we will see the opposite reaction. Volatility could pick up in the next few months and normally that’s the case when stocks are coming down.
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I think that there can be some reversals coming in the markets, specifically with Emerging markets (EEM), where price is coming out of an EW channel after a completed five-wave cycle. Therefore, a three-wave (A)-(B)-(C) setback can see more weakness.
The next very important market for positive economic cycle is Crude oil, where higher price is caused by higher demand which comes out of economic activity. But energy is turning down now, so this can be the first indication for potential lower stock prices in weeks ahead.
It’s also important to mention that the S&P 500 Index is approaching 4000, a key psychological price level. It is also trading within a potential wedge pattern (also known as a reversal pattern).
With that being said, I think that it’s good to be aware of a potential reversals in the weeks ahead and be properly prepared rather so we aren’t negatively surprised when they happen. I believe that these markets have room for more upside but retracements are healthy and almost necessary at this point to attract new buyers at better price levels.
Twitter: @GregaHorvatFX
The authors may have a position in the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
