US stocks continue to be weak, with the S&P 500 large-cap stock index (SPX) falling 4.6% for the week. The market is now probing the recent lows set in late October. The SPX closed at 2633 for the week, whereas the intraday low of October 29 was 2603.
Our assessment is that the market is now set to break down through the October lows. Upon the continuation lower, following a small bounce in the 2530 – 2550 range (corresponding to the February lows), we expect that the market will continue lower toward a 2350 – 2372 target.
This lower stock market target consists of the following technical levels. When multiple high-probability levels appear within a narrow range on the chart, such represents a high-probability target zone:
- the lower long-term stock channel boundary (magenta color, 2350) and
- the 50% Fibonacci retracement of the entire 2016 – 2018 advance (silver, 2372).
In sum, we see the market declining toward 2350 – 2372 over the quarter ahead. Then a decline of up to 11% from present levels.
It can be tempting to question why the stock market should continue falling. Especially, since bonds, the initial cause of the stock market weakness is now rallying:
However, such a question would assume that the market is perfectly rational according to a single metric. Which it is not. Instead, we expect that momentum-based sellers will soon show up, and/or that another fundamental trigger will emerge within the next few weeks to send the broad stock market to new lows.
During the initial market selloffs as we are now witnessing, it is important that we regularly monitor the entire spectrum of traditional safety assets.
We must learn what is truly acting as a safe haven now in the modern era, versus what previously may have filled that role in past macrocycles.
Below are the five assets – gold, US bonds, US dollar, Japanese yen, and Swiss franc – which, at one time or another over the past 50 years, have typically been considered safety assets by the market. These are all plotted since the absolute peak in the stock market in late September and the subsequent ~10% decline:
Notably, gold has been the best performer thus far.
The US dollar and US bonds have both rallied. Although the dollar was notably absent in strength over the past trading week.
The Japanese yen has not maintained its pace with gold. This has been improving the gold/yen ratio that we follow regularly. Yet not causing a sufficient divergence to change the ongoing 7-year consolidation (to be updated over the coming weeks in a separate article).
The Swiss franc, in decades past considered nearly equal to gold, has failed to receive a safe-haven flow as a net sum, falling alongside stocks.
Takeaway on Safety Assets
Gold is showing an important early lead as we witness the initial decline underway in stocks.
What will become increasingly important for precious metals investors then, is: what happens to the US stock market after the present decline concludes? If stocks stabilize and resume a further advance – which still fits within our model of expectations – all safety assets, including gold, could be sold. Let us stay alert as stocks reach these lower prices.
BULLION EXCHANGES MARKET ANALYST
Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency.
Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is a third-party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.