S&P 500 Breaks Rising Wedge

Money Show

Published Jan 22, 2019 02:53PM ET

Updated Jan 22, 2019 07:09PM ET

Fundamental headwinds due to the government shutdown along with technical weakness, a break of rising wedge pattern, are putting pressure on stock indexes, notes Matt Weller.

The U.S. stock markets were closed yesterday in remembrance of Dr. Martin Luther King, and given the headwinds the world economy faces, perhaps policymakers could benefit from his overriding message of inclusion and cooperation.

Many of the biggest risks facing the global economy stem from a failure to “get along,” both internationally (the ongoing US-China trade war) and domestically (the U.S. government shutdown & Brexit). The last 24 hours highlighted these differences on numerous fronts: The U.S. extradition request for a prominent Chinese businesswoman, the IMF’s decision to downgrade its global growth forecasts (due partially to trade tensions), the lukewarm reception to PM May’s Brexit Plan B bill, and the increasingly-contentious U.S. government shutdown.

As a result, traders are aggressively selling U.S. equities, with major indices unwinding the gains from Friday’s trade-optimism-induced rally. From a technical perspective, the S&P 500 has now broken down from its rising wedge pattern off the Boxing Day panic low (see chart below). Despite the seemingly bullish name, this price action pattern shows that buyers are struggling to push the price higher on each subsequent swing. It is a classic sign of waning buying pressure and often portends a bearish reversal. That said, we’re hesitant to make any broad conclusions off merely a single down day, especially following such a strong rally off the lows.