Source: PaxForex Premium Analytics Portal, Fundamental Insight
US economic data remains mixed but generally points to an economic slowdown. The World Bank slashed its global growth forecast for 2023, led by its prediction for the US economy. Its previous report called for an expansion of 2.4%, while its latest analysis lowered it to just 0.5%. Given the ongoing slowdown, the World Bank report could prove optimistic, as more economists anticipate a steep US recession. Market participants underestimate the severity of an extension of the current bear market should US GDP data show a contraction. The US Federal Reserve is not in a position to lower interest rates, as it combats multi-decade high inflation, which could spiral the sell-off out of control in the short term. The SP500 could collapse between 25% and 50% from present levels, reaching mathematical fair value as computed by its long-term growth rate since inception.
Fourth-quarter earnings seasons and corporate outlooks will provide the next catalyst for price action. Technology companies, those popular for meme trades among retail traders, growth names, and companies trending on social media and online discussion boards, will lead equity markets lower. It will represent a classical shift in investor capital, as they have powered the artificial bull market post the 2008 global financial crisis and during the post-pandemic era. Market participants could see less selling in defensive names, value stocks, and dividend aristocrats. The long-term trend for the SP500 remains bearish, and 2023 could follow 2022 losses but at an accelerated pace. It can provide buying opportunities in the first quarter of 2024.
The forecast for the SP500 turned bearish with price action inside of its narrowing Ichimoku Kinko Hyo Cloud, where the Senkou Span A moves lower, and the Senkou Span B ascends. A bearish crossover will increase downside pressures, confirming the bearish pattern following a lower high. Volatility could increase as bulls and bears square off after the Tenkan-sen and the Kijun-sen flatlined. A bearish crossover between them would accelerate bearish momentum. Traders should also monitor the CCI in extreme overbought territory after it has recorded its peak and begun to drift lower. A breakdown below 100 could start the expected sell-off, while a move below zero should accelerate selling pressure in this equity index. Can bears regain control of price action and force the SP500 into its horizontal support area? Subscribe to the PaxForex Daily Fundamental Analysis and earn over 5,000 pips per month.
Should price action for the SP500 Index remain inside the or breakdown below the 3,865 to 3,955 zone, PaxForex recommends the following trade set-up:
- Timeframe: D1
- Recommendation: Short Position
- Entry Level: Short Position @ 3.920
- Take Profit Zone: 3.490 – 3.580
- Stop Loss Level: 3.980
Should price action for the SP500 Index breakout above 3,955, PaxForex recommends the following trade set-up:
- Timeframe: D1
- Recommendation: Long Position
- Entry Level: Long Position @ 3.980
- Take Profit Zone: 4.050 – 4.100
- Stop Loss Level: 3.955
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