S&P 500 down, near first support – how much lower can it go? | chart watcher

Will the Fed cut interest rates at its March meeting? Investors were looking for answers from Federal Reserve Chairman Jerome Powell, who took the podium today. Unfortunately, Powell didn’t take a firm stance on this, which is not what the stock market wanted to hear.

Broad stock market indices, including the Dow Jones Industrial Average ($INDU), S&P 500 ($SPX) and Nasdaq Composite ($COMPQ), fell further after Powell took the podium. All three indices closed lower today. The S&P 500 was down 1.61%, the Dow Jones Industrial Average was down 0.82% and the Nasdaq Composite was down 2.23%. Today, the communications services and technology sector is among the worst performers.

If you look at the daily chart of the S&P 500 below, you can see that despite today’s decline, the index is still trending upward. The Fibonacci retracement level annotation from the January 4, 2022 high to the October 13, 2022 low shows a 100% retracement level that coincides with the 21-day exponential moving average. (EMA). This could be the first support level to pay attention to. If the S&P 500 continues to decline and reaches its 50-day simple moving average (SMA), the uptrend is no longer valid and price action should be looked for at the next support level. This may be the 50-day SMA for now, but that could change.

Chart 1. The S&P 500 is nearing its first support level. The 21-day exponential move and the 100% Fibonacci retracement level coincide at around 4825. The S&P 500 closed Wednesday at 4845.65. Chart source: StockCharts.com. For educational purposes.

Federal Reserve Speech

Today’s price action indicates just how big the stock market has priced in the March rate cut. According to the CME Fedwatch Tool prior to today’s announcement:The probability of an interest rate cut in March was about 50%. However, the possibility of an interest rate cut has since fallen to the 36% range.

Powell said the economy was making good progress, labor market supply and demand conditions were improving and inflation was moderating, but the Federal Open Market Committee (FOMC) needed greater confidence that inflation was moving toward its target levels. do. 2% target.

Powell said the Fed was in “risk management” mode and the timing of rate cuts was important. If you do it too soon, the progress you have made so far may be reversed. As a result, the Fed is prepared to keep interest rates steady for longer if necessary. As always, the decision depends on the data.

One point Powell mentioned several times is the strength of the labor market. The region is strong, but would like to see the forces of supply and demand balanced. Today’s ADP Private Sector Jobs Report shows new jobs coming in lower than expected. After hearing Powell’s comments today, investors will be paying close attention to Friday’s data, so let’s see what Friday’s January jobs report reveals. One more month of encouraging data would mean a move towards a rate cut in May rather than March. However, if the labor market continues to be strong, expect additional sales to occur.

Another point Powell raised was that the Fed remains committed to lowering inflation to 2%. The FOMC is in no rush to cut interest rates as there are risks that inflation could settle above 2%.

The benchmark 10-Year U.S. Treasury Yield Index ($TNX) fell on Wednesday (see chart below), closing at 3.97%, near its close on January 12.

Chart 2. Daily chart of the 10-year US Treasury yield index. The decline in yields is related to the government’s financing plans. How much further can 10-year yields fall?Chart source: StockCharts.com. For educational purposes.

On another note, shares of Alphabet (GOOGL), Microsoft (MSFT), and Advanced Micro Devices (AMD) all fell after the companies reported quarterly earnings after the close on Tuesday.

Does today’s decline mean a correction is coming? Some days there is no trend, so look at support areas for the S&P 500 and other indices. The economy remains strong, and as long as that remains the case, stocks are likely to reach support levels and then bounce back.

disclaimer: This blog is for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.