US indices are tired of falling

The S&P500 index closed last week with a powerful rally, rebounding from its 200-week moving average. By the start of trading in New York, index futures managed to overcome the initial weakness caused by the fall in Chinese equities.

We also note that in the previous three weeks, investors pulled the indices upwards on declines below this line. This buying spree represents the intention of market participants to remain within the paradigm set up over the last couple of decades.

The last time the index was persistently under this line was in March 2020 due to high covid uncertainty. Before that, the S&P500 dipped in June 2008 and May 2001. In all those cases, the US economy ended up in a recession and the monetary authorities aggressively eased policies to put the economy back on a growth path.

However, if the S&P500 is now the best the market can hope for, it is a slowdown in the pace of policy tightening. So, on Friday, the markets were turned around by a WSJ article that the Fed, after a 75-point rate hike in November, is further prepared to put on breaks on rate hiking. This is important news as the WSJ often acts as the Fed’s informal mouthpiece.

Without any negative surprises from macroeconomic data that could cause the Fed to change its mind, the markets will probably continue their gradual recovery in the coming weeks.

Not only is the 27% market decline on the bullish side, but it has also made many companies attractive for buying. There is also a bullish divergence in price and RSI on the weekly charts, setting the stage for further gains.

Cautious buyers would be wise to wait for the S&P500 to get above 3820, where the 61.8% level of the August-October decline coincides with the highs of early October.

But the recovery is too fresh and fragile, and the current bounce could easily stall. If that is the case, we should be prepared for markets to move to new lows in the coming weeks. But this is an alternative scenario, not the main one.

The FxPro Analyst Team