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  • Weekly Focus: Who Saved the U.S. Stock Market from a Deeper Drop?

Weekly Focus: Who Saved the U.S. Stock Market from a Deeper Drop?

The drop of U.S. stock indexes suddenly stopped on Monday after the Dow Jones index dropped by 3.3%, the S&P 500 broad market index lost 4.0%, and the Nasdaq 100 was down by 5.0% during the day. Somebody “saved” the stock market moving indexes from reaching the positive territory of 0.3-0.5%.

It is unlikely that hedge funds would have conducted such a rescue operation as they were ready to initiate a massive sell-off while waiting for Dow Jones and S&P 500 to slide below their 200-days moving average. Most of their operations are initiated by trading algorithms, so they were ready for a possible plunge. Now investors have timid hopes for stabilsation or even a recovery as the major S&P 500 index is still above the 200-day moving average indicating a possible rebound. However, both Dow Jones and Nasdaq 100 are below their 200-days average. That points to a fragile situation when the market may easily continue to slide without the kind of continuous support that we saw on Monday.

The saviour could be the Federal Reserve (Fed) that is currently showing no interested in market turmoil just before the beginning of its two-day meeting on Tuesday. But is this a long-term strategy for the Fed to save the stock market at any cost? If we look closely at the Federal Open Market Committee (FOMC) and the statements made by its members, as well as White House Administration statements, we may suggest that the strategy has truly changed. The cornerstone of the stratagem has become inflation tackle and market sustainability, but not market growth at any cost. So, if the stock market is ready to go down, the Fed will not interfere unless clear signs of turmoil would be seen.

Consequently, the Fed has supported the market to eliminate any possibilities that would delay a faster pace of monetary tightening, but not enough to return it to the growth trajectory. With this in mind, we may expect the stock market to return to the downside track after the Fed meeting on Wednesday, unless the stock indexes move above their 200-days averages.

Technically, the S&P 500 index is on the downside track. It has already reached its primary downside target at 4350-4400 points, and even secondary target at 4250 points. For it to  go lower to the next target at 4050-4150 points something extraordinary must happen. In the case of a breakthrough of this level we may clearly witness a collapse in the stock market. So, it is really hard to forecast anything beyond a few days. Both the possibility of a baseline downside scenario and an alternative upside rebound are strong. It is better to keep an eye on 200-days average levels and act accordingly. If the stock indexes somehow manage to return above this level some short-term buy positions may be considered. Otherwise, we should expect the stock market to decline further.

The upward trend in the oil market has changed to the downside as Brent crude benchmark prices dropped to $84.50 per barrel. We may also consider the next targets to be at $82.00-83 per barrel. This idea is supported by stalling business activity in most of the developed nations. January PMI indicators released on Monday recorded a decline, especially in the service sector in Australia, Japan, the Eurozone, the United Kingdom, and the United States.

Gold prices are enjoying geopolitical tension between Russia and Ukraine and rising U.S. Treasuries yields are being ignored. Prices are hovering around a strong support level at $1840 per troy ounce. The upside period for gold prices may continue throughout March, so we may expect them to move further to $1910-1930 after a clear indication of a breakthrough of $1840 per ounce level.

EURUSD is approaching very important support levels. If the pair holds above the 1.12500-1.12800 level after Fed meeting, it will remain within the upward channel and may suddenly perform an upside spike towards 1.15200-1.15300 on Thursday or Friday.

GBPUSD is on the downside trend with the primary target at 1.32200-1.33200. The decline may resume after a consolidation at the 1.34900-1.35000 resistance level. Once the decline is resumed it will create good sell opportunities.