Source: PaxForex Premium Analytics Portal, Fundamental Insight
Financial markets finished last week on a positive note, as bargain hunters stepped in and added positions to their long-term portfolios. Traders should exercise extreme caution, as this bear market rally shows signs of exhaustion. Today’s trading session is light on economic data, with US durable goods orders and pending home sales the only market-moving releases. China reported weak industrial profits for May with a year-to-date contraction. Weaker than expected US economic data today could end the current advance, and traders must beware of a perfect bull trap.
This week marks the end of the second quarter, and they could experience a volatility spike later this week as asset managers tweak portfolios. Inflation remains high and will continue to harm the global economy throughout 2022 and most likely remain a dominant factor throughout the decade unless a severe global recession disrupts the trend. Central banks just began their tightening cycle, and they are actively draining liquidity as they are behind the curve of their creation. The US technology sector is particularly vulnerable, and while the current bear market brings valuation back towards reality, it has plenty of room to the downside to achieving this task. The SP500 has roughly 25% downside before equity valuations are reasonable, and anything below that would offer valuable opportunities.
The US economy is slowing faster than expected, while inflation manifested itself deep into the financial system. It will take months for interest rates to show an impact, but consumers feel the pinch. Parents in the US report skipping meals to feed their families, the savings rate has collapsed, and some call for more stimulus, which fueled inflation during the pandemic. US consumers loaded up on more debt or dipped into retirement savings, and while it prevented more short-term pain, they borrowed future output, painting a severe negative outlook. Traders should be wary of the current bull trap and prepare for more downside.
The forecast for the SP500 remains bearish with price action approaching its descending Ichimoku Kinko Hyo Cloud. Volatility can increase with the Kijun-sen flat and the Tenkan-sen drifting moderately higher. Traders should monitor the CCI, which is on track to reach extreme overbought territory. It could signal the end of this bear market rally and begin the next move to the downside, expected to result in a lower low. Can bears regain control of the SP500 and force it 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 3,855 to 4,000 zone, PaxForex recommends the following trade set-up:
- Timeframe: D1
- Recommendation: Short Position
- Entry Level: Short Position @ 3.915
- Take Profit Zone: 3.325 – 3.395
- Stop Loss Level: 4.090
Should price action for the SP500 Index breakout above 4,000, PaxForex recommends the following trade set-up:
- Timeframe: D1
- Recommendation: Long Position
- Entry Level: Long Position @ 4.090
- Take Profit Zone: 4.220 – 4.300
- Stop Loss Level: 4.000
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