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S&P 500 Index Approaches Resistance Ahead of 3Q US Earnings Season

S&P 500 Index, US Q3 Corporate Earnings, Covid-19 Vaccine, Johnson & Johnson – Talking Points:

  • The haven-associated US Dollar and Japanese Yen clawed back lost ground during the Asian trading session.
  • The temporary cessation of Johnson & Johnson’s Covid-19 vaccine trials may foster a period of risk aversion.
  • S&P 500 index is at risk of sliding lower as the RSI swerves away from overbought territory.
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Asia-Pacific Recap

Equity markets broadly gained during Asia-Pacific trade, with Australia’s ASX 200 index climbing 1.04% and Japan’s Nikkei 225 index nudging 0.18% higher.

A setback in coronavirus vaccine trials appeared to weigh on market sentiment, as the haven-associated US Dollar and Japanese Yen clawed back lost ground against their major counterparts.

Gold dipped back below the $1920/oz mark and silver slipped as much as 2%, despite yields on US 10-year Treasuries moving 1 basis point lower.

Looking ahead, the Euro-area’s ZEW Economic Sentiment Index release for the month of October headlines the economic docket alongside US inflation data for September.

S&P 500 Index Approaches Resistance Ahead of 3Q US Earnings Season

DailyFX Economic Calendar

Halted Covid-19 Vaccine Trials to Weigh on US Equities

Better-than-expected third-quarter US corporate earnings may limit the downside for the benchmark S&P 500 index, as fading fiscal aid hopes and a pause in one of the more promising Covid-19 vaccine trials begins to gnaw at investors’ sentiment.

Johnson & Johnson (J&J) announced that it had paused all clinical trials of its coronavirus vaccine due to the discovery of a study subject with an unexplained illness.

Of course, this temporary cessation has been described as an “expected part of any clinical study, especially large studies” by J&J in a statement released on October 12, with the New Jersey based medical device company adding that “as many trials are placebo-controlled, it is not always immediately apparent whether a participant received a study treatment or placebo”.

However, with this being the second time a Covid-19 vaccine trial has been paused in recent months – Astrazeneca temporarily halted its vaccine trials in September – a delayed restart may significantly weigh on the performance of risk-associated assets in the near-term.

That being said, third-quarter earnings from leading financial firms JPMorgan, Citigroup and BlackRock may counterbalance the disappointing developments in the battle against Covid-19, as investors continue to focus intently on the battle between incumbent President Donald Trump and Democratic nominee Joe Biden ahead of the US presidential election on November 3.

S&P 500 Index Futures Daily Chart – RSI Hints at Fading Momentum

S&P 500 Index Approaches Resistance Ahead of 3Q US Earnings Season

S&P 500 index futures daily chart created using TradingView

From a technical perspective, the US benchmark S&P 500 index could be at risk of reversing lower in the near-term, as price fails to breach psychological resistance at the 3550 mark.

With the RSI swerving away from overbought territory and volume notably fading throughout the S&P 500’s rebound from the September low (3198), the path of least resistance seems skewed to the downside.

That being said, the development of the 21-day moving average hints at building bullish momentum, as it appears to be eyeing a cross above its ‘slower’ 50-period counterpart.

Nevertheless, a short-term correction looks in the offing, with a daily close back below 3500 probably precipitating a period of more aggressive selling and generating a pullback to key support at the February high (3397.50).

S&P 500 4-Hour Chart – Inverse Head and Shoulders Pattern Playing Out?

S&P 500 Index Approaches Resistance Ahead of 3Q US Earnings Season

S&P 500 index futures 4-hour chart created using TradingView

Zooming into a 4-hour chart, however, depicts a more bullish scenario than that seen on the daily timeframe, as the 50-DMA jumps back above its sentiment-defining 200-period counterpart and the RSI continues to track firmly within overbought territory.

With price slicing easily through the neckline of the Inverse Head and Shoulders reversal pattern carved out from early September, a push to fresh record highs looks on the table.

The bullish reversal pattern’s implied measured move (3629.5) suggests that price could rise a further 3.3% from current levels and push above the psychologically imposing 3600 mark.

Nevertheless, with the RSI sliding back from its highest intraday readings since early September and resistance at the 88.6% Fibonacci (3542.75) stifling bullish potential, a near-term pullback looks likely.

A break below 3500 would probably generate a retest of former resistance-turned-support at the Inverse H&S neckline (3424), if sellers successfully overcome support at the 23.6% Fibonacci (3458.5).

Change in Longs Shorts OI
Daily-8%7%3%
Weekly-15%8%0%

— Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss