Sharp sell offs tend to continue lower in the following day(s). Down momentum normally takes time to dissipate. A lower low is likely still ahead.
But sell offs triggered by a shock event like "Brexit" tend to bottom and then reverse rather quickly. That is likely now as well as investors realize that the non-binding vote will have little material affect within the next year or two, if ever. Moreover, several studies related to extremes in volatility and sentiment suggest US equities are nearing a point where a reversal higher is very likely.
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In our last market summary three weeks ago, the near term set-up was for a mild mid-June swoon: the SPX had reached a prior resistance zone, some measures of short-term sentiment were excessively bullish and June is a seasonally weak month, with most of that weakness taking place during the middle 3 weeks. Since then, SPX has lost 3%. That post is here.
Our longer term view was that further gains lie ahead for the US indices: a sell off in June is frequently a set up for higher prices into summer. That is still our view.
Three weeks ago, the SPX was within 1% of its all-time highs (ATH) where every rally in the past 16 months has failed (blue arrow). Moving through this thick overhead resistance has once again proved difficult. At the end of this week, SPX closed about 1% above mid-May support near 2020. Below this level, and SPX will have made a "lower low", raising the risk of reentering the "hot mess" from August/September 2015 and January/February 2016 (enlarge any chart by clicking on it).