S&P 500 Bounces from Low but is Evergrande, FOMC Pushing a Possible Turn?
S&P 500 Bounces from Low but is Evergrande, FOMC Pushing a Possible Turn?
KEY POINTS:
- Stocks have been on their back foot since last week, but the S&P 500 is catching a bounce today from Fibonacci support.
- Next week brings the FOMC and there’s likely a little caution here as the bank may begin to announce taper plans for 2021. But with the situation around Evergrande rising in importance, there’s now another risk factor for the Fed to contend with. Markets have seemingly shrugged off this risk so far.
It seems almost blasphemous to ask when trends have been in full force for 18 months. But, are we finally at the point where prices put in a significant turn of 20% or more?
The key ingredient to this continued build has been constant and heavy support from the US Federal Reserve. But over the past few months the bank has been laying the groundwork for the start of tapering asset purchases, with the most recent word on the matter taken from the July FOMC meeting minutes. In that release, ‘most’ members felt it would be appropriate to begin tapering bond purchases by the end of the year.
And one look at the NFT market, or Non-fungible tokens, where pixelated jpeg images are selling for millions in cryptocurrency, combined with the other illustrations of froth that have been so present in US markets, and there’s understandable motive for the FOMC in trying to prevent the b-word from popping up (bubbles, that is).
But what makes the current situation so interesting is that, for the first time since the Global Financial Collapse, there’s a legitimate risk of contagion within the banking sector. Evergrande is a massive property developer in China, and there’s about 500 billion of risk there, 200 in assets and 300 in liabilities. By comparison, Lehman brothers was about 600 billion. But Evergrande is a property developer, and those assets aren’t as liquid as market securities, so as they sell assets to raise cash, they’re devaluing the very same assets that remain on their books that they may later want to sell for cash. Not to mention the collateral damage.
We’ve shrugged off what feels like a thousand risk episodes since the Global Financial Collapse, but perhaps we’ve run into a risk that can’t be summarily discounted in the same way, as contagion is a factor that a Central Bank may find considerably more difficult than buying bonds in an open market.
I had looked into this yesterday when talking about short-term setups on the Dow, S&P and Nasdaq.
On a bigger picture basis, the rally in the S&P 500 has been going on for 18 months now. And to put this in scope, this move has happened amidst a global pandemic, in which global governments have forced lockdowns and business closures. Normally this would be considered as a risk factor that might not be positive for equities. But, it has been, in a very, very big way.
On the weekly chart below, I’m pointing out a rising wedge formation which will often be approached with the aim of bearish reversals. We’re still holding support there at this point. But the 14.4% retracement of the pandemic move is all the way down at 4206, which is about 5.87% away from current price, as of this writing.
The 23.6% retracement, which would still keep the bullish trend in order, is down at 3987, so just inside of the 4k psychological level. A push down here would be a move of 10.77% from the current level. And the 38.2% retracement which, similarly, would keep the door open for bulls, is a whopping 18.53% away, and that would entail a total peak-to-trough move of 19.84% (from the Sept. high), which is bear market territory.
So, technically we could see a bear market develop while the bullish trend still stays in workable order.
S&P 500 WEEKLY PRICE CHART
Chart prepared by James Stanley; S&P 500 on Tradingview
Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.