Source: PaxForex Premium Analytics Portal, Fundamental Insight
The debt ceiling debate in the US overtook inflationary concerns this week, and traders focused on news of a breakthrough in bipartisan talks. Regardless of the drama surrounding debt talks, which Democrats and Republicans use to strengthen support among their voter base, both parties always agree to increase it. The same will happen over the next few weeks, even if the agreement to raise or suspend the debt ceiling comes on the eve of default. The destructive pattern of living above the means the economy can sustain resulted in the government debt surging over the past 25+ years.
Policymakers and traders should ignore the media attention surrounding an all-buy-guaranteed increase and focus on unsustainable debt levels. Consumers continue to pile on debt to support the economy. With interest rates above 5.00%, which used to be closer to the norm before debt exploded, most borrowers, especially Millennials and younger generations, have a hard time dealing with this economic reality, which they have helped create. Interest rates will remain high and could inch higher, which will not only pressure consumers but also add tens of billions in monthly interest rate payments for the US government.
US Financial markets climbed a wall of worry and are held higher by a floor of hope. First quarter earnings season, especially forward guidance, the transportation sectors, and home improvement retailers all point to a slowing economy. A recession is likely in the second half of 2023, and inflationary sub-components of regional economic indices began moving higher. Inflation came down from its peak, but it could force more monetary tightening, which can unravel the fairy tale rally in the SP500.
The forecast for the SP500 turned cautiously bullish after this equity index surged into a major horizontal resistance area, which rejected price action in February following a similar advance. Volatility is likely to spike as bulls and bears fight for directional control. The Kijun-sen and the Tenkan-sen drift higher, but the Ichimoku Kinko Hyo Cloud has flatlined and could attract price action. Traders should also monitor the CCI after it spiked into extreme overbought territory at a fresh 2023 high and at unsustainable levels. A breakdown below 100 could grant bears the upper hand and force a sell-off. Can bears repel bulls and regain control over the SP500 to force price action into its horizontal support area, which includes the psychological support level of 4,000? 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 4,185 to 4,255 zone, PaxForex recommends the following trade set-up:
- Timeframe: D1
- Recommendation: Short Position
- Entry Level: Short Position @ 4.200
- Take Profit Zone: 4.000 – 4.045
- Stop Loss Level: 4.285
Should price action for the SP500 Index breakout above 4,255, PaxForex recommends the following trade set-up:
- Timeframe: D1
- Recommendation: Long Position
- Entry Level: Long Position @ 4.285
- Take Profit Zone: 4.325 – 4.370
- Stop Loss Level: 4.255
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