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S&P 500: Short-Term Dip or New Downtrend? Key Levels You Should Keep an Eye on

Published 30/05/2024, 08:59 pm

US index futures initially extended their losses but staged a comeback after European markets opened higher on positive Eurozone data. Meanwhile, Chinese shares took a tumble.

But after a weaker close on Wednesday following a series of disappointing US Treasury auctions and a sell-off in long-date bonds, risk appetite is waning, and the US dollar is finding support on the dips.

Although this could just be a short-term fluctuation before Friday's crucial US data release - namely, the core PCE price index - the correction is worth monitoring, particularly if the selling in Treasuries continues.

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Why is risk sentiment low?

The market appears increasingly worried about the possibility of interest rates staying elevated for a longer period, and not just in the US. So far there is no outright panic, but it is becoming increasingly difficult to justify continued buying of stocks amid a lack of any fresh catalysts.

Investors’ relentless demand for technology stocks has sustained the stock market rally for months, supporting indexes like the Nasdaq 100 and S&P 500, even as other sectors show signs of weakness.

However, even technology stocks now appear overextended, suggesting a long-overdue correction may be imminent. Without new bullish catalysts and after months of substantial gains, a correction should come as no surprise. A lot will be dependent on the upcoming PCE inflation data and the direction of bond yields.

The renewed sell-off in bond yields has been partially driven by an unexpected rise in US consumer confidence for May and weak auctions of US Treasuries. The Federal Reserve’s continued hawkish stance has also supported the dollar and yields, with several officials downplaying the likelihood of an early rate cut in recent speeches.

While the US dollar was a touch weaker on Thursday morning’s session, the strength of the greenback was so pronounced on Wednesday that even a higher-than-expected CPI report from Australia, which effectively ended hopes for a RBA rate cut this year, failed to provide lasting support for the AUD/USD pair.

What else to watch out for today?

Today, the revised first-quarter US GDP data for 2024 will be released, with a slight downward revision anticipated to an annualised (i.e., quarterly change x 4) pace of 1.2% from 1.6% initially. Additionally, we will receive the weekly jobless claims numbers, seen steady around the 215K-220K mark, pending homes sales (-1.1% drop expected) and the April trade data.

If today’s data releases turn out to be stronger than expected, then this could see the bond sell-off gain further momentum and take global equities down another leg.

S&P 500 technical analysis and trade ideas

The big bearish engulfing reversal pattern on the S&P 500 that we saw on Thursday from an all-time high, means we may have seen at least a temporary top in the markets. But until yesterday, we hadn’t seen any downside follow-through. With index futures breaching last Thursday’s low, we now have some more confirming bear signals to work with, although more evidence of a reversal is still needed.

SPY Daily Chart

The SPY (NYSE:SPY) ETF, which is an index fund that aims to track the performance of the S&P 500 index, closed just above the March high of 524.61 on Wednesday. This level is going to be important in as far as the short-term trend is concerned. A decisive break below it would tip the balance in the bears’ favour. If so, we could potentially see some follow-up selling pressure towards the next support seen around 510.75, the high that was made at the end of April before the breakout took place in early May. The next key level below that is 500, which is more of a longer-term support level.

In terms of resistance, 527.11, which was the low from Tuesday, is the first line of defence for the bears, given that we have broken below this level decisively. A potential break above this level could pave the way for 530 and potentially paving the way for a new high above last week’s range at 533.07.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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