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  • Weekly Summary: S&P 500 Correction Extends to 5% before Jackson Hole Symposium

Weekly Summary: S&P 500 Correction Extends to 5% before Jackson Hole Symposium

Investor’s sentiment is seen overwhelming amid tense situation in the financial market. This does not mean that volatility would not increase further. But, the fact of the overheated situation in the market should be kept in mind as it may result in a deteriorating stock market.

Could a stock market slump be an option for the Federal Reserve (Fed)? It could certainly break the fever of inflation in the American economy, and push it down to the targeted 2.0%. Could the Fed stop a market slump when needed to stop it before U.S. presidential election in 2024? Even the Fed doesn’t understand it.

Technical picture for the S&P 500 broad market index signal the correction accelerating. The first target of this correction is at 4200-4300 points, which is a strong support level in August. Thus, we may see the index to dive by 2-3% more from the current level at 4365 points. A stablisation after correction is likely to follow resulting in a rebound or a flat. This would be the most comfortable scenario for investors, but the fundamentals are in favor of market correction that is likely to be continued.

Economic fundamentals are in the worst possible combination. Weak China’s economy undermines global economic perspectives that is a major driver for stock. Strong U.S. economy accelerates expectations of further monetary tightening by the Fed, which is contributing to weakening global economic conditions in the future. One of these factors should be improved to stop stocks from diving further. Therefore, lower interest rates in China may improve economic perspectives in the country. Weak PMI data next week or some dovish statement by the Fed’s Chair Jerome Powell at Jackson Hole Symposium could ease expectation of further monetary tightening by the American watchdog.

Technically, the S&P 500 index has changed formation to the downside with primary target at 4200-4300 points and extreme targets at 3800-3900 points. The downside signal has been finally shaped with a short trade initiated at 4520 points.

Brent crude prices bounced from the resistance at $86.00-88.00 per barrel, and are diving towards the nearest support at $74-76 per barrel. This downside could be reached if prices will dive below $85 per barrel. If prices would fell below $74 per barrel a recession scenario with targets at $64-66 per barrel of Brent crude will be initiated. 

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. But, the situation has changed dramatically as the important support level of $1980-2000 per ounce was smashed. The nearest support is set at $1890-1910 per ounce. However, the similar scenario of August 2011 signals that this support will be very hard to breakthrough in the coming weeks. In the emergency case of a breakthrough, short positions could be opened after prices retest $1890 per ounce level.

The Greenback is trying to perform a correction, still looking solid compared to its major peers. A sharp correction of the American currency could be expected in August. Efforts of China’s Central bank to support Yuan may facilitate this correction. If such a correction would emerge, good buy opportunities for the Dollar should appear. But before then, a risky long trade with a small amount is seen for GBPUSD from 1.27200-1.27400 with a target at 1.29400-1.29600, and a stop-loss at 1.26000. The long trade in the AUDUSD from 0.65100-0.65300 with a target at 0.66500 with the stop-loss at 0.64800 was closed after a stop-loss order was heated by the price. This trade could be reopened at 0.64700-0.64900 with the same target and the stop-loss at 0.64400.

If these trades will be successful, a further weakening of the Greenback could be expected. It would be better to wait for a decline of the EURUSD below 1.05000 to seek out sell opportunities for the Greenback in this regard.