S&P 500

IN THE US last week, stocks snapped their two-week winning streak as concerns over the European debt situation and stalemate between the Democrats and Republicans over the raising of the US debt ceiling continued to dog traders.

By InvestSMART · 18 Jul 2011

By InvestSMART ·
18 Jul 2011

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The ratings agencies did little to help, with Moody's putting the US's triple-A rating on review for possible downgrade. The broad-based S&P 500 lost 2.1 per cent to close the week at 1316.1.

The market printed a lower high and lower low, which reverses the short-term uptrend that was in place. I mentioned last week that the S&P 500 may be in the final stages of forming a bearish head and shoulder reversal pattern. This looks to be the case following last week's reversal.

The right-hand shoulder has formed, meaning all attention will now focus on the rising neckline around the 1265 level. We would need to see a decisive break down through this level before the pattern has completed. If this played out then a downside target towards the 1150 level would be projected.

It appears storm clouds are forming on the horizon. The market is starting to get quite jittery over the US debt ceiling debate. With each passing day, the risk of US default rises, which many are now saying could trigger a precipitous plunge in equity markets. On top of that, euro zone concerns continue to bubble away, with Italy the latest focus.

Looking ahead, sovereign debt worries in the US and Europe and a pickup in Q2 US earnings data are going to compete for traders' attention.

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Frequently Asked Questions about this Article…

Why did the S&P 500 drop last week and how much did it fall?

The S&P 500 snapped a two‑week winning streak as worries over the European debt situation and a US debt ceiling stalemate weighed on traders. Ratings pressure also contributed after Moody's put the US triple‑A rating on review for a possible downgrade. The index lost 2.1% and closed the week at 1,316.1.

What does Moody's putting the US triple‑A rating on review mean for investors?

According to the article, Moody's action signals increased concern about US sovereign creditworthiness and adds to market uncertainty. That review for a possible downgrade can make investors jittery because it raises the perceived risk of US government debt and can influence equity and bond market sentiment.

What technical warning signs did the article highlight for the S&P 500?

The market printed a lower high and a lower low, reversing the short‑term uptrend. The article also notes the S&P may be forming a bearish head‑and‑shoulders reversal, with the right‑hand shoulder now formed — a setup that warrants attention from technically minded investors.

What is the key neckline level to watch on the S&P 500 and why does it matter?

The rising neckline is around the 1,265 level. The article explains that a decisive break down through that neckline would complete the head‑and‑shoulders pattern and project a further downside target — so a break below 1,265 is a technical trigger to monitor.

If the head‑and‑shoulders pattern completes, what downside target did the article project?

If the bearish head‑and‑shoulders pattern plays out and the S&P decisively breaks the neckline, the article projects a downside target toward the 1,150 level.

How are US debt ceiling talks and the risk of default affecting equity markets?

The article says the stalemate between Democrats and Republicans over raising the US debt ceiling is making markets jittery. With each passing day the perceived risk of a US default rises, which many market participants fear could trigger a sharp plunge in equity markets.

What European issues are investors being warned about in the article?

Euro‑zone sovereign debt concerns remain in focus, with Italy singled out as the latest source of worry. The ongoing euro‑zone debt worries are contributing alongside US fiscal risks to elevated market uncertainty.

What should everyday investors watch next according to the article?

The article suggests investors should watch sovereign debt developments in the US and Europe — including the US debt ceiling negotiations and rating reviews — as well as a pickup in Q2 US earnings data, which will compete for traders' attention and help shape market direction.