The inventory market has had fairly every week. First, there was JP Morgan Chase (JPM)’s takeover of First Republic Financial institution (FRC). Then got here the warning from Janet Yellen that the US could hit its debt ceiling as early as June 1. That is rather a lot to digest, particularly the information concerning the debt ceiling, since most buyers weren’t anticipating it to return so quickly.

What may occur if the US defaults on its debt? It may ship the inventory market spinning; folks could not get their month-to-month profit checks, and a few components of the federal government may shut down, not less than for some time. Briefly, there may very well be main chaos.

Those that had been engaged with the monetary market within the final 12 years could bear in mind what passed off through the debt ceiling debacle in 2011. To refresh your reminiscence, the inventory market plummeted, and S&P downgraded the credit standing of the US. And that had repercussions the next yr—the fee to borrow shot up, and there have been many price cuts.

May the same scenario happen this yr? Let’s hope that does not occur, however, to be ready, it does not harm to do a chart evaluation that identifies the varied potential help and resistance ranges.

Debt Ceiling 2011 vs. 2023

The broader indexes—the S&P 500 index ($SPX), the Dow Jones Industrial Common ($INDU), and the Nasdaq Composite ($COMPQ)—have been inside a buying and selling vary for the final six months or so. And for those who take a look at the historic charts, the same situation unfolded in 2011. From February to July, the S&P 500 index moved sideways (see chart under). At one level, it seemed just like the index would possibly development larger, however, alas, it fell by fairly a bit. We’re speaking from about 1350 to 1120; that is roughly a 17% drop inside a couple of weeks. And take a look at the CBOE Volatility Index ($VIX)! After hanging out under the 20 degree, it spiked to virtually 50.

CHART 1: S&P 500 INDEX DURING THE 2011 DEBT CEILING FIASCO. The index fell roughly 17%, and the VIX spiked.Chart supply: StockCharts.com. For illustrative functions solely.

To not scare anybody, however this can be a chart you wish to save in considered one of your ChartLists, since the same situation may play out as we strategy the debt ceiling “X-date.” And if that date occurs to be June 1, that is not too far-off.

Within the chart above, the market bottomed in October, after which the S&P 500 began rising. And the VIX dropped decrease to its regular vary of lower than 20. After the three-month hiccup that lasted from August to October, the market continued its journey larger.

The VIX may very well be some of the necessary indicators to look at forward of the debt ceiling X-date. It is retreated to its pre-COVID ranges, staying under the 20 degree. If it begins turning larger and strikes in that route whereas the index begins to drop, much like what occurred in 2011, it might be a good suggestion to remain on the sidelines and wait till market stability resumes. If historical past is any indication, the wait could solely be a couple of months.

For those who flip your consideration to the month-to-month chart of the S&P 500 index under, it appears to be like just like the market is making an attempt exhausting to maintain the rally going, following the upward slope of the 50-month shifting common, which may act as a help degree.

CHART 2: MONTHLY CHART OF S&P 500 INDEX. Taking a look at a longer-term chart helps to see a “huge image” view of the market. The S&P 500 remains to be trending larger, as indicated by its 50-, 100-, and 200-month shifting averages.Chart supply: StockCharts.com. For illustrative functions solely.

Does a shorter-term chart additionally present an uptrend? Let’s flip to the day by day chart of $SPX and add Fibonacci retracement ranges to it (see chart under). Utilizing the January 2022 excessive and October 2022 low, the Fibonacci retracement ranges present the 50% degree at 4155.10 as a resistance degree. The S&P 500 has tried to interrupt above this resistance degree, but it surely lacks the follow-through.

CHART 3: FIBONACCI RETRACEMENT LEVELS AND VIX. The S&P 500 index may transfer between the 38.2% and 50% Fibonacci retracement ranges if issues stay the identical. but when the debt ceiling X-date comes sooner than anticipated, it may fall as little as its October low. And the CBOE Volatility Index ($VIX) is creeping up.Chart supply: StockCharts.com. For illustrative functions solely.

How issues unfold is anybody’s guess, however it might be value maintaining a tally of actions within the S&P 500 with respect to the totally different Fibonacci retracement ranges. It may proceed to maneuver between the 50% and the 38.2% ranges if issues stay the identical and the debt ceiling X-date stretches out by a couple of months. But when June 1 turns into a actuality, then the S&P 500 may fall to its October low of 3491. That is just a little greater than a 16% drop, which is nearly in keeping with the drop that occurred in 2011. And the VIX is beginning to creep up. Keep watch over that.

The Backside Line

This can be just a little too shut for consolation, however do not rule out something in the case of the inventory market. You might do the same evaluation with the opposite indexes to see if the same image emerges. There is a Fed assembly developing, earnings season will wind down, and you need to resolve for those who ought to promote in Could and go away.

Maintain Your Dashboard in your radar. It will provide help to establish which areas of the market are outperforming and which of them are underperforming. If there is a replay of 2011, not less than you will be higher ready and able to soar into the outperforming asset courses. The most effective you are able to do to turn into a better dealer or investor is to remain on prime of market-moving commentary.

Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your personal private and monetary scenario, or with out consulting a monetary skilled.