Dow Jones
The S&P500 index reacted to the Fed’s message the other day by correcting previous advances. However, before getting panicked, let us not forget a few things before turning on the bear side.
First, the S&P500 made a new all-time recently. In doing so, it broke important resistance and shrugged off the 2020 pandemic decline.
Second, this is a correction in a rising trend, like many others seen so far. It merely represents another opportunity to go on the long side.
Third, while many voices call for a tech bubble that will drag lower the stock market, the risk ahead comes not from tech companies. After all, they have beaten expectations and will likely continue to do so. But the risk will come from the upcoming U.S. elections. Therefore, the chances are that the stock market continues to be attracted to the highs until the elections are behind us or until there is some more clarity on that front.
Yesterday’s message from the Fed, while dovish, it turned out to be not dovish enough for the markets. As always, the stock market pushes to extremes when it comes to its expectations from the Fed.
It only received stronger forward guidance, without any additional stimulus. And a hint that the U.S. Congress will follow with additional stimulus. As such, the disappointment translated in a move lower towards yesterday’s closing.
The technical picture fully reflects the bullish bias that remains unchanged. The S&P500 corrected to the previous horizontal resistance turned into support. Moreover, at the same level, it meets dynamic support, making the area difficult to break on the downside – a confluence area.
To trade it, one should wait for the market to move above 3,450 before going long. Next, a stop-loss below 3,300 is needed and a take profit that respects the 1:2 or even 1:3 risk-reward ratio.
