Chart of the Day: Which Direction Will S&P 500 Break?

  • Stock Market Analysis
  • Editor's Pick
  • Investors await short-term direction from Fed
  • Big macro risks call for caution long-term
  • Long-term bearish trend vs. shorter-term bullish trend

After ending a streak of five consecutive negative closes on Thursday, the S&P 500 futures have risen ahead of the cash open and U.S. PPI data. Still, I don’t think the markets will be in a hurry to go anywhere this week. The name of the game is consolidation ahead of the big macro events taking place next week. 

The S&P 500 futures has stayed below the long-term bearish trend line and 200-day average over the past few sessions. But so far, support at 3924ish has held firm, where we also have a short-term bullish trend line converging. Soon, one of these trend lines will break. It could be in the next few trading sessions, given the next CPI release is on Tuesday, and big central bank meetings are taking place between Wednesday and Thursday. 

S&P 500 Futures Daily Chart

Will it be the bears or the bulls who will come out victorious? 

As we head towards the year’s closing weeks and look forward to the start of 2023, there are plenty of reasons why investor sentiment might remain negative. While there’s no doubt that the bulls have had the upper hand in the last couple of months, 2022 has been a bearish year. Thus, if you are long or bullish, don’t ignore any bearish reversal signs you might see, as the markets can be punishing. 

Two major reasons have supported the recent recovery: 

  • Optimism that the sharp central bank policy tightening will become less aggressive before rate hikes are paused altogether in the first half of next year. That’s all because of signs inflation has peaked in the U.S. 
  • Optimism about China re-opening its economy after effectively dropping its Zero-COVID policy. 

But dangers remain. For one, price pressures could remain sticky. For another, the global economic outlook is far from rosy, with economic activity likely to slow down further in the next few months. And with consumers hurt so badly by inflation, you would think that company sales and profits might suffer this holiday season. 

But in terms of the more immediate risks facing investors, inflation data on Tuesday could move the markets sharply again. It all depends on whether we will see a more profound slowdown in the annual CPI below the 7.6% expected figure or whether we will be disappointed this time. Then it is all about the Fed on Wednesday, with the BoE and ECB to follow on Thursday. 

A 50-basis point rate hike from the Fed is priced in, so how the markets might behave will be determined by the signals from the Fed Chair and his FOMC colleagues on how aggressive they will be moving forward and how high they will project the terminal interest rate to be.

If the Fed hints at a 5% or higher terminal rate, this could trigger a risk-off response in financial markets. If it is well below that level, it should lead to only a short-lived bounce. 

Disclosure: The author does not own any of the securities mentioned in this article.

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