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S&P500 Technical Analysis – Will the Fed Shake the Markets?


The S&P500 has been on an uptrend for 2 months now, which was amplified by the failure of the US CPI in November and sparked a FOMO-like rally.

This “bear market rally” recently ran into a strong one-year technical trendline and gained news against the narrative that supported the rally. This narrative was based on poor economic data in hopes of a less aggressive Fed and an earlier pause in its tightening cycle.

S&P500 awaits key US data

Tuesday: US CPI.

Wednesday: FOMC political decision

We’ve seen the jobless rate rise, the US manufacturing PMI plummeting and the Fed signaling a slowing pace of increases from December with a 50bps move instead of the 75bps they have adopted four times in a row.

Finally, November’s US CPI report surprisingly missed expectations and prompted the market to expect an earlier pause from the Fed as recessionary signals from leading indicators may finally show signs in the lagging indicators.

Recently however, the market has been hit by economic data

Economic data

Economic data usually comes in the form of daily press releases. This information is extremely valuable for retail and institutional traders, given the influence of this data on exchange rates. Most major economic events published are reported by sovereign governments around the world. Moreover, several economic data points are released by private organizations which can also move the market. Overall, when new information becomes available, the value of a currency pair changes to reflect a new equilibrium potentially created by traders. This information that changes the value of a currency pair can ultimately take many forms, with economic indicators or data being the primary drivers. Why Economic Data Matters in Forex Economic data is an important barometer that investors can use to measure the performance of an economy. This in turn can influence exchange rates. For example, the stronger the economic data, the more growth is likely to increase in the country, causing a currency to strengthen. If the gross domestic product (GDP) growth in the United States is high, it will help drive up the US dollar. The reverse is also true. Generally, weaker economic data may predict slower growth. The attempt of traders, when trading economic data, is to gauge how economic indicators are perceived against expectations. Before almost every economic release, the market typically assesses the median expectation reflected by analysts and economists. These known variables are simply expectations, and the unknown is the actual version. Since currency pairs can move significantly based on new data, traders always try to anticipate where the actual numbers will arrive when they come out. Changes to economic data will also filter down to potential interest rate changes by a central bank. Overall, economic announcements from the United States and the Eurozone are highly watched as they will influence the perceptions of market participants who help guide interest rates and other monetary policies of the Federal Reserve or the European Central Bank (ECB) respectively.

Economic data usually comes in the form of daily press releases. This information is extremely valuable for retail and institutional traders, given the influence of this data on exchange rates. Most major economic events published are reported by sovereign governments around the world. Moreover, several economic data points are released by private organizations which can also move the market. Overall, when new information becomes available, the value of a currency pair changes to reflect a new equilibrium potentially created by traders. This information that changes the value of a currency pair can ultimately take many forms, with economic indicators or data being the primary drivers. Why Economic Data Matters in Forex Economic data is an important barometer that investors can use to measure the performance of an economy. This in turn can influence exchange rates. For example, the stronger the economic data, the more growth is likely to increase in the country, causing a currency to strengthen. If the gross domestic product (GDP) growth in the United States is high, it will help drive up the US dollar. The reverse is also true. Generally, weaker economic data may predict slower growth. The attempt of traders, when trading economic data, is to gauge how economic indicators are perceived against expectations. Before almost every economic release, the market typically assesses the median expectation reflected by analysts and economists. These known variables are simply expectations, and the unknown is the actual version. Since currency pairs can move significantly based on new data, traders always try to anticipate where the actual numbers will arrive when they come out. Changes to economic data will also filter down to potential interest rate changes by a central bank. Overall, economic announcements from the United States and the Eurozone are highly watched as they will influence the perceptions of market participants who help guide interest rates and other monetary policies of the Federal Reserve or the European Central Bank (ECB), respectively.
Read this term which show the resilience of the economy. In fact, after the huge intraday rally prompted by less hawkish than expected Fed Chairman speech, the US NFP report surprised by beating expectations on jobs created and inflationary higher than expected wages. with previous figures revised upwards.

A few days later, the ISM Services PMI beat expectations as the prices paid sub-index remained elevated. Finally, the US PPI report beat expectations and may cause the market to go on the defensive ahead of Tuesday’s CPI report. Below you can see all the catalysts on the S&P500 1 hour futures chart.

Two recent weeks of price action and catalysts on the S&P500 on tradingview.com

On a technical level, the price ran into a 1-year downtrend line which acted as resistance and started a fall breaking the 2-month uptrend line as risk sentiment deteriorated after NFP and ISM data. After bouncing off support in the 3920-3940 area, price retested the broken trendline and was dismissed as US PPI data beat expectations.

Looking at the daily chart below we can see that the 3920-3940 area is also the neckline of the head and shoulders pattern and a break down could lead to further selling but we may need to wait for US CPI and FOMC. to get a clearer picture.

S&P500 daily chart at tradingview.com

If both risk events occur on the hawkish side, we will most likely see the price crash and resume the downtrend and, at this point, say goodbye to the hoped-for Santa Claus rally.

Alternatively, in case the US CPI report again misses expectations and the FOMC policy decision is made as expected or even on the less hawkish side, then we could see the price rally again and possibly reach the level 4320.

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