The S&P 500 sold off sharply last week as growth concerns, widening
credit spreads and the risk of renewed US-Iran strikes weighed on risk
sentiment. Although no new US attack has occurred so far, the risk of further
escalation remains elevated as we approach the US midterm elections.
The fundamentals continue to point towards further downside, with very few bullish
drivers at the moment. Widening credit spreads, persistent inflation pressures,
elevated energy prices, geopolitical uncertainty and a hawkish Federal Reserve
are likely to limit any rebound.
The Middle East crisis remains one of the key drivers. A de-escalation in
the Saudi-Houthi conflict or a surprise breakthrough in US-Iran negotiations
would likely trigger a sharp correction in oil prices, ease inflation concerns
and support the S&P 500.
The focus has now shifted to the FOMC decision due tomorrow where the Fed
is widely expected to keep interest rates unchanged. A surprise rate hike would
trigger strong risk-off flows, particularly in the stock market as growth
concerns will likely intensify.
A largely neutral outcome that avoids signalling an imminent rate hike
could be taken as dovish and trigger a relief rally in the S&P 500. I would
also expect the same reaction but with less magnitude in case the Fed just
delivers on the hawkish hold expectations, avoiding major surprises.
With no new projections or dot plot expected at this meeting, changes in
Warsh’s or statement’s language will be the main focus.
S&P 500 TECHNICAL ANALYSIS – DAILY TIMEFRAME
On
the daily chart, we can see that
the S&P 500(CFD contract) bounced from the key swing point around the 7,613 level.
If we get another move lower, we can expect the buyers to step in around the
swing level, with a defined risk below it, to position for a rally into new
record highs. The sellers, on the other hand, will want to see the price
breaking lower to increase the bearish bets into the 7,506 level next.
S&P 500
TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On
the 4 hour chart, we have a
downward trendline defining the bearish structure. We can expect the sellers to
lean on the trendline, with a defined risk above it, to keep targeting new
lows. The buyers, on the other hand, will look for a break higher to pile in
for a rally into new record highs, with the 7,770 level as the first target.
S&P 500 TECHNICAL
ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we
have a minor upward trendline defining the current pullback. If the price falls
into the trendline, we can expect the buyers to lean on it, with a defined risk
below it, to target a break above the downward trendline. The sellers, on the
other hand, will look for a break lower to target a break below the 7,613 level.
The red lines define the average daily range for today.
UPCOMING CATALYSTS
Todaywe
get the US Consumer Confidence report. Tomorrow, we have the FOMC rate
decision. On Thursday, we get the US GDP report, the US PCE and the latest US
Jobless Claims figures. On Friday, we conclude the week with the US Employment
Cost Index.
This article was written by Giuseppe Dellamotta at investinglive.com.