Market players are stunned and confused after two days of whipsaws that have dropped the S&P 500 index to a five-week low, potentially entering a summer correction that could presage more dangerous downside in the fourth quarter. There was little hint of this volatility explosion on Monday and Tuesday when major benchmarks pulled back from last week's all-time highs in preparation for Wednesday's eagerly awaited Federal Reserve decision.

That changed after a 0.25% rate cut, a disorienting Powell press conference, and an angry presidential tweet directed at the Fed Chair. The market shook off those concerns on Thursday morning, taking back the prior day's loss, ahead of Trump's bombshell announcement that another $300 billion in tariffs will hit Chinese imports on Sept. 1. Intraday price action turned tail immediately, giving up the day's gains before the index closed at weekly and monthly lows.

The Nasdaq 100 and Russell 2000 indices incurred similar damage after dropping off recent highs while the bond market surged, dumping the 10-year Treasury yield to the lowest low since the 2016 election. All benchmarks are now digesting Friday's nonfarm payrolls report, but the strong number isn't likely to stem the downward tide because this isn't the time to seek direction by looking in the rear-view mirror.

Given the growing headwinds, it makes sense for investors and market timers to tighten up stops, take some profits, and rotate a share of capital into more defensive instruments, including higher-yielding equities with limited exposure to current political hot spots. The growing list of affected areas may include the European Union at this point because the president could announce new tariffs directed against the EU as early as Friday afternoon. 

SPY Weekly Chart (2016 – 2019)

Chart showing the share price performance of the SPDR S&P 500 ETF (SPY) 

The SPDR S&P 500 ETF (SPY) bottomed out at $181 in January 2016 after a 13-month correction and turned higher, breaking out to a new high after the presidential election. The rally stalled in January 2018, giving way to a volatile pullback, followed by a nominally higher September peak. It plunged to a 15-month low in the fourth quarter and turned higher into 2019, carving a steady uptick that failed this week at the shallow trendline of rising highs.

A cup and handle breakout (red line) marked the highlight of bullish July price action, with the assault above $294 ending right at the magnetic $300 level. The fund has broken this support level in the pre-market session, and if the downside holds, wide-ranging technical sell signals will expose the 50-week exponential moving average (EMA) at $283. Unfortunately, the daily chart shows unfilled gaps down to $275, raising the odds for further downside into the 200-week EMA near $250.

The fund bounced at the moving average in 2016 and 2018, highlighting the need for bulls to hold the line at all costs because further selling pressure could reach the bottom of the massive broadening formation, also known as a megaphone pattern, that has been in play since Trump fired the first shot of the trade war. That down leg could be ferocious, undercutting the 2018 low while targeting the .786 Fibonacci rally retracement level at $207. 

To be honest, the Fibonacci grid stretched across the 2016 into 2019 uptrend is just speculative at this point because we don't know if July's all-time high at $302.23 will mark the highest high of the rally wave. However, all ducks appear to be lined up in a perfect row at this time, with 2018 selling waves ending at the .382 and .50 retracement levels after a relentless uptick into the historic 3,000 level on the S&P 500 index. In any case, the evidence is strong enough at this time to take immediate defensive action.

The Bottom Line

Major benchmarks have turned sharply lower after a volatile trading week and may have entered major corrections.

Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.