Investors who sold into the “Brexit” vote panic on Friday and Monday are kicking themselves today.

The S&P 500 – which dropped more than 5% in the two days following the United Kingdom’s vote to leave the European Union – has rebounded sharply.

[ad#Google Adsense 336×280-IA]The index closed Wednesday almost 2% higher than where it traded down to last Friday.

A couple of months from now, though, the folks who are buying into this bounce will be the ones kicking themselves.

You see, the sort of market action we’ve seen over the past week often leads to lower prices in the months ahead…

Take a look at this chart of the S&P 500…

The red circles on the chart show where the nine-day exponential moving average (EMA) crossed below the 50-day moving average (DMA). The two previous times we saw this “bearish cross” – last December and last June – stocks sold off right away.

Both times, the S&P 500 recovered nearly all of its losses before plunging sharply lower over the next two months.

In other words, the initial selloff that occurred following the “bearish cross” turned out to be an early warning sign of a much stronger decline to come.

Now, let’s look at the recent action.

Last Friday’s selloff caused the S&P 500’s nine-day EMA to drop below the 50-DMA. Stocks fell immediately – which is typically what happens following a bearish cross.

Since then, the S&P 500 has bounced back and recovered a good portion of the decline. The index may still have room to rise further if this pattern plays out like the previous two occurrences.

But the real trouble will come a few weeks from now. You can see the big declines that happened just a few weeks after the previous bearish crosses. A similar move this time could push the S&P 500 down to less than 1,900 by September – 8% lower than Wednesday’s closing price.

Traders should be cautious here. The stock market often struggles to make gains during the summer. And with the recent bearish cross on the chart, this summer could be even rougher for stocks.

Best regards and good trading,

Jeff Clark


Source: Growth Stock Wire