S&P 500 Tanks as Rising Tensions Between Russia & Ukraine Spark Flight to Safety

(MENAFN- DailyFX) S&P 500 OUTLOOK:

• Geopolitical tensions fuels volatility and weigh on risk assets
• The S&P 500 drops more than 2% on fears Russia could launch an offensive and invade Ukraine any moment
• Technical analysis suggests the S&P 500 could head lower in the coming days

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Most read: Dow, S&P 500, Nasdaq Price Forecasts - Bears Brewing as Risk Rise

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:

Russia invades Ukraine – A sharp downward reaction in stocks is likely, although energy stocks could hold up on the expectation that economic sanctions on Moscow could lead to a disruption in energy supplies and thus higher oil and natural gas prices. All in all, any pullback in the broader market may be transitory, as the crisis should not have a material impact on the global economy.

Democracy prevails, Russia decides to continue dialogue - We could see a relief rally, oil prices could drop significantly as the geopolitical risk premium decreases. As frictions ease, monetary policy should come back into focus, with the Fed meeting in March closely watched.

S&P 500 TECHNICAL ANALYSIS

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.

S&P 500 TECHNICAL CHART

S&P 500 (SPX) Chart by TradingView

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---Written by Diego Colman, Contributor

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