S&P 500 Tanks as Rising Tensions Between Russia & Ukraine Spark Flight to Safety
Feb 18, 2022
Volatility has been extreme on Wall Street this year. The Federal Reserve’s transition to a tighter monetary policy stance in response to soaring inflation has weighed on sentiment, prompting investors to de-risk their portfolios and shun bets on growth and tech plays amid rising Treasury rates.
The simmering conflict in Eastern Europe has made matters worse, contributing to market anxiety and leading stocks to swing wildly with no clear direction. The current price dynamics highlight a key fact: geopolitical tensions are very difficult to trade, especially if the situation is fluid and ambiguous. Against this backdrop, the S&P 500's performance has been mixed this week, down 2.12% to 4,380 on Thursday on risk-off mood and flight to safety, after climbing roughly 1.7% in the previous two sessions.
With the Russia-Ukraine standoff heating up by the hour, volatility will remain elevated and unpredictable, leaving markets at the mercy of the headlines that cross the wires. At this point, it is difficult to say how the crisis will unfold, but the United States and its allies seem convinced that President Putin may launch an offensive and give the order to invade Ukraine soon, perhaps in the "next several days."
Although The Kremlin denies weighing on attack, satellite imagery and intelligence point to a continued buildup of Russian military forces in several locations near the Ukrainian border, a sign that an incursion is possible. To avoid being caught in losing positions, traders may want to wait out and limit directional speculation, at least until there’s concrete evidence diplomacy has created a détente or war has broken out. In any case, we should have more information in the coming days and weeks, but two possible scenarios are highlighted below:
On Monday I talked about a double top formation in the S&P 500. The bearish pattern has been confirmed, suggesting that the index’s balance of risks is skewed to the downside, a situation that may pave the way for a move towards the 4,300 psychological level in the coming days.
However, if dip buyers resurface and prices reverse higher, the first resistance to consider appears near the 200-day SMA and then at 4,490, this week’s high. If the S&P 500 manages to clear these hurdles, bulls may find momentum to drive the index towards 4,520, the 50% Fibonacci retracement of the January selloff.
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