S&P 500, Nasdaq 100 talking points:
- U.S. equities remained in the rectangle formation until about an hour ahead of yesterday’s U.S. close. Since then, it’s been a very bearish backdrop.
- This morning brought another installment in the inflation theme and after last month’s moderation down to 8.3%, this month saw yet another jump to fresh 40-year-highs.
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
Last month brought a bit of hope as headline inflation printed at 8.3%. While that’s not a great number considering the Fed’s 2% target, it was a bit lower than the 8.5% that had printed in the prior month and, frankly, it was one of the few silver linings that bulls could grasp on to. Inflation had only continued to jump since August of last year and last month coming in a bit lower than the prior month gave hope that inflation may have topped.
This morning dashed those hopes as headline inflation printed at another fresh 40-year high of 8.6%. The chart below shows the growth in headline CPI since the beginning of last year, and way down at the bottom of that chart is a red line for where the Fed says that they want inflation to be at.
US CPI Since January 2021
Chart prepared by James Stanley
As you can imagine, that disappointment hasn’t been taken well by markets so far. The immediate response was a painful one as both Treasury yields jumped as stocks tanked, and the US Dollar caught another leg higher following yesterday’s breakout from an ascending triangle pattern.
Next week brings the FOMC and the bank is widely-expected to hike by 50 basis points. It’s so widely-expected that there’s little consternation of anything else, so the focus will likely be on the bank’s forecasts regarding how hawkish they’ll be at future meetings. It seems, at this point, that even July is fairly certain for another 50 basis points so the big question is what the Fed will be doing for September.
After this morning’s CPI release, odds for another 50 basis point hike in September firmed to reasonable levels so it looks like markets will be expecting another half-point increase at that rate decision.
I had looked at the USD in this week’s technical forecast, holding a bullish bias on the currency after last week started to show some evidence of bottoming. That support showed up at a key area that I’ve been following and the early-portion of this week presented an ascending triangle formation that was primed ahead of the ECB rate decision.
I had looked into the US Dollar yesterday morning, just after the ECB meeting but before that breakout started to hit. With EUR/USD seeing more pain after the combo of the ECB statement and this morning’s CPI release, there could be more in store here and that swing high at the psychological level of 105.00 is vulnerable in DXY as we move into next week.
US Dollar Four-Hour Price Chart
After the ECB took a dovish approach to yesterday’s rate decision the bottom fell out of the single currency. And as inflation remains brisk in the U.S. and the Fed is forced to respond, the divergence between the two economies has only continued to grow and this is on display in the EUR/USD pair.
As looked at yesterday, EUR/USD was already testing a key support zone. But, the market had set a fresh low and there was potential for a continued slide. That support has since been broken and prices are on the way down to the next marker on the chart, plotted at the psychological level of 1.0500.
EUR/USD Four-Hour Chart
The more notable move at the moment however is showing in equities.
Stocks have had a rough 2022 so far. But, for a couple of weeks that took a back seat as prices bumped up from key areas of support in both the S&P 500 and the Nasdaq. But, as I wrote earlier this week, those bounces looked vulnerable as the bearish leaning appeared to remain, even with that two-week spurt of hope.
Sellers started to hit equities late in yesterday’s session, with about an hour to go, and that slide has continued through the early-portion of Friday trade.
In the S&P 500, the box has been broken and prices are pushing down towards a major area of support. This area is around the 3800-3830 area and it’s the zone that caught the lows last month. It’s also around the area that marks -20% bear market territory.
This zone being traded through is a major deal and would denote fresh 15-month lows on the S&P 500. However, there may be a more bearish scenario that I’ll look at after the next chart.
S&P 500 Daily Price Chart
The Nasdaq 100 is more bearish than the S&P 500 and given the drivers, that makes sense. And, moving forward, if we are seeing the big bear trend on its way back then the tech-heavy index may remain as a more attractive venue for bears.
I had looked into this on Wednesday, comparing the recent moves of the two indices. The S&P 500 had found support at the 38.2% retracement of the pandemic move, and resistance at the 23.6% retracement. Presented below on the weekly chart.
S&P 500 Weekly Chart
Chart prepared by James Stanley; S&P 500 on Tradingview
To make an apples-to-apples comparison, the Nasdaq 100 has slid all the way down to the 50% marker of the same major move, spanning the March 2020 low up to the recent high. And while the S&P 500 bounced up for resistance at the 23.6% retracement, the Nasdaq bounced up for resistance at the 38.2% retracement.
From these comparable Fibonacci retracements, we can see greater development of the bearish theme in the Nasdaq 100 as the easy-money policies that built this move have started to come out of the market.
Nasdaq 100 Weekly Price Chart
And even on a shorter-term basis, the Nasdaq 100 has some greater bearish appeal as prices have already started to peel down into that next support zone.
Given that this is a Friday and we’ve already seen a strong move over the past 18 hours, this could be difficult to chase. But, it very much remains in focus for next week as the FOMC goes through what’s likely to be one of the more climactic FOMC rate decisions in recent memory.
Nasdaq 100 Daily Price Chart
Chart prepared by James Stanley; Nasdaq 100 on Tradingview
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX