Bears take hold of US indices

It was a very telling performance from the US equity market on Thursday, as three major indices – the S&P500, Nasdaq-100 and Dow Jones 30 – confirmed the dominance of the bearish trend. At least in the medium term.

The most closely followed US market indices experienced a sharp sell-off as they approached their 50-day averages. The amplitude of Thursday’s decline was more significant than the market’s surge the day before. It was a battle between expectations and reality.

Expectations were represented by the tech sector with the latest hype around AI and its realisation in the form of Nvidia’s report and forecasts. The company beat revenue expectations by a wide margin last quarter and raised expectations for the coming quarter. But this optimism managed to fuel further buying interest in the stock. Nvidia shares were up 0.3% by the end of the day, having risen 10% in the pre-market.

Markets came under pressure from restrictive interest rates. In response to another small batch of economic data that fed the hawks at the Fed, demands increased their expectations that the Fed was not done raising rates. For the first time since March, the probability that the Fed Funds rate would be above 5.50-5.75% at the end of the November 1 meeting rose above 51%. That probability fell to 49% on Friday, according to the FedWatch tool, supporting a slight rebound in equity futures.

On Thursday, the Dow Jones Index lost more than 1.6% from its intraday high, with the selling intensifying just after the touch of the 50-day moving average. A similar but less intense dynamic was seen on Monday. By Thursday, however, it was clear that the bears were in control. At least as far as the medium-term trend is concerned. There is now a sparse area on the chart up to 33800, where the 200-day moving average and a few support points pass through. A full-blown correction of the index’s rise since October 2022 is around 33000.

The dynamics of the S&P 500 near its 50-day clearly show the importance of this level. The initial drop below it on August 10 was followed by three days of declines in the index. And Thursday’s attempt to cross this curve from the bottom to the top triggered a sharp sell-off that wiped out more than 1.3% of the day’s gains and almost all gains made since the beginning of the week. Should the risk-off sentiment persist, the S&P500 could quickly return to 4200.

The Nasdaq-100, which lost around 2.2% on Thursday, also suffered a heavy sell-off as it touched its 50-day moving average. The index also fell out of its bullish corridor for the second time this year. If the severity of high interest rates is indeed becoming a market driver, then growth stocks look the most vulnerable. If this is the case, it makes sense to expect a deeper correction in the Nasdaq, which could take the index as low as 13300, with a chance of an earlier stop in the 13700-14000 area.

The FxPro Analyst Team