This week, the S&P 500 experienced a significant loss of 3.1%, reflecting a notable decline in market value. The downward movement accelerated throughout the week, indicating heightened selling pressure. On the 1-hour time frame, a new downtrend (shown in gray) has been established, as illustrated in the chart. This downtrend suggests a shift in market sentiment towards a more bearish outlook. The reason behind this downward trajectory could be attributed to the ongoing uncertainty surrounding the situation in the Middle East, which has contributed to market volatility and heightened risk aversion among investors.
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The S&P 500 has had strong downward movement since the break of the robust uptrend on April 4th. Currently, it is down -6.7% from its peak to the trough. This correction of 5-10% has been anticipated for weeks, and it has finally materialized. The index is now approaching a minor support trendline, indicating a potential bounce in the near term. As illustrated in the chart, the target to the downside is around 4800 points, coinciding with the old high from January 2022 (marked by the red zone in the chart). This level could serve as a significant support area and a potential reversal point for the index.
The macro environment remains negative, with various signals from the Risk Level Indicator (RLI) increasingly confirming this. My baseline scenario anticipates rising stock prices until the recession in the USA or a credit event in the spring of 2024. Particularly noteworthy is the Federal Reserve’s Bank Term Funding Program (BTFP), which was launched after last year’s banking crisis to assist banks facing difficulties due to high interest rates. This program has expired, and banks now must gradually repay the loans to the Fed over a year. The RLI will detect emerging issues in a timely manner and adjust the risk level accordingly. At the moment, a somewhat defensive allocation in stocks is recommended.
The world of finance is complex and includes many technical terms. For explanations of these terms, I recommend using the Investopedia dictionary.
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