Possible Economic Recession: Is It Knocking on the Door?
Global financial markets have been shaken by uncertainty following recent statements from former U.S. President Donald Trump. A sense of fear and risk aversion has spread throughout the market, leading to a shift in investor behavior. The main current thesis revolves around sector rotation—capital is flowing out of the U.S. stock market, especially from the technology sector, and could end up benefiting emerging markets such as Brazil or even China.
This article, however, will focus on technical analysis, evaluating key financial charts to understand the current economic scenario. We will analyze Nasdaq, S&P 500, gold, copper, and the VIX (fear index) to measure market sentiment.
Market Overview: Nasdaq & S&P 500
Nasdaq: Breaking a Major Trendline
The Nasdaq suffered a 4% drop on Monday, one of the sharpest declines since 2022. While Tuesday provided some relief, major tech stocks like Apple (-2%) and Google (-0.6%) showed signs of weakness. The technical outlook suggests significant risks:
- A major trendline was broken on the weekly chart.
- Retesting previous highs from 2021 as potential support.
- A possible retracement to the 38% Fibonacci level could indicate an additional 8-15% decline.
- If the market continues to drop beyond 20%, it would officially enter a bear market.
S&P 500: The End of ‘Buy the Dip’?
Historically, sharp drops in the S&P 500 were seen as buying opportunities—known as the “buy the dip” mentality. However, this sentiment is shifting. The index is still above its 20-period moving average on the monthly chart, but a major correction could change that quickly.
- A retracement to the 50% Fibonacci level would imply a drop exceeding 20%, officially marking a bear market.
- The weekly chart shows lower highs and the loss of key support levels.
- The market is experiencing capital outflows exceeding $1.7 trillion in a single day, signaling significant risk aversion.
If this correction turns into a prolonged downturn, we could be on the verge of a full-blown economic recession.
Flight to Safety: Gold & the Fear Index (VIX)
Gold at All-Time Highs
Historically, in times of uncertainty, investors turn to safe-haven assets like gold. The recent surge in gold prices confirms this trend:
- Gold is at all-time highs and continues to rise despite being overbought (RSI above 70).
- No technical signs of reversal yet, indicating strong bullish momentum.
- If gold remains above key support levels, it could signal prolonged market uncertainty.
VIX: The Fear Index Soars
The VIX (Volatility Index), often referred to as the fear gauge, spiked sharply on Monday, reminiscent of the 2020 pandemic crash:
- Historically, VIX levels above 35 indicate significant market distress.
- The index has broken out of consolidation and is accelerating upwards.
- While it’s unlikely to reach pandemic-era levels (above 80), the current surge confirms a climate of fear and risk aversion.
What About Copper? A Key Economic Indicator
Copper is often regarded as a leading indicator of economic health due to its widespread use in industrial production. Historically, copper price declines have preceded recessions, including the 2008 financial crisis.
Currently:
- Copper remains above its 20-period moving average, suggesting resilience.
- However, it has formed lower highs, indicating potential weakness.
- A break below key support levels could confirm concerns about economic slowdown.
Conclusion: Is a Recession Coming?
The Nasdaq and S&P 500 are showing signs of technical weakness, with key trendlines breaking and volume surging. The VIX is spiking, signaling increased fear, while gold is reaching record highs as investors seek safety. Copper remains stable for now, but its next move could provide crucial insights into the broader economy.
If the downturn in equities persists and turns into a sustained 20% drop, it would officially mark the beginning of a bear market and possible economic recession. However, the final confirmation will depend on upcoming macroeconomic data and whether key support levels hold.
For those looking to navigate these uncertain times, it’s crucial to have a solid risk management strategy and stay informed. If you’re interested in deepening your knowledge, check out my free international markets course, available through the link below!
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