Fundamental Overview
The S&P 500 has been on a steady decline since the last US CPI report on July 11th. In the first stages of the pullback, we’ve been seeing a rotation from big cap stocks into small cap stocks as the Russell 2000 displayed an opposite price action. Eventually, the bearish momentum picked up and we saw a more aggressive decline with the index falling by 5%.
A good argument has been that most of the moves we’ve been seeing in the past 10 trading days were driven by deleveraging from strengthening Yen. Basically, the squeeze on the carry trades impacted all the other markets. Given the magnitude of the recent appreciation in the Yen and the correlation with many other markets, it looks like this could be the reason indeed.
If that’s the case, we could see the market getting back to the old script with the BoJ Policy Decision likely acting as a catalyst on Wednesday. In fact, from a big picture perspective, nothing has changed as the market continues to expect at least two rate cuts by the end of the year and sees some chances of a back-to-back cut in November.
The data continues to suggest that the US economy remains resilient with inflation slowly falling back to target. Overall, this should continue to support the soft-landing narrative and be positive for the general risk sentiment as the Fed is going to cut rates into resilient growth.
S&P 500 Technical Analysis – Daily Timeframe
On the daily chart, we can see that the S&P 500 eventually pulled all the way back to the major trendline around the 5435 level where we had also the 38.2% Fibonacci retracement level for confluence. The buyers stepped in with a defined risk below the trendline to position for a rally into a new all-time high. The sellers will need the price to break below the trendline to increase the bearish bets into new lows.
S&P 500 Technical Analysis – 4 hour Timeframe
On the 4 hour chart, we can see that we have a strong resistance zone around the 5550 level where we can find the confluence of the previous swing low and the downward trendline. This is where we can expect the sellers to step in with a defined risk above the trendline to position for a drop back into the lows targeting a break below the major trendline. The buyers, on the other hand, will want to see the price breaking higher to invalidate the bearish setup and increase the bullish bets into a new all-time high.
S&P 500 Technical Analysis – 1 hour Timeframe
On the 1 hour chart, we can see that we’ve been printing higher highs and higher lows into the resistance on this timeframe as the bullish momentum started to pick up after the price bounced on the major trendline. This is where the sellers will look for a rejection, while the buyers will look for a breakout. The red lines define the average daily range for today.
Upcoming Catalysts
Tomorrow we have the US Job Openings and the US Consumer Confidence reports. On Wednesday, we have the BoJ Policy Decision, the US Employment Cost Index and the FOMC Policy Decision. On Thursday, we get the latest US Jobless Claims figures and the US ISM Manufacturing PMI. Finally, on Friday, we conclude the week with the US NFP report.
