S&P 500, Nasdaq, Dow Jones: Tighten After CPI, Focus on September FOMC

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S&P 500, Nasdaq, Dow Jones Talking Points:

  • US stocks continue to trade on their backfoot after last week’s pullback, to varying degrees depending on the index being analyzed.
  • The Nasdaq 100 is holding bullish breakout potential as the Dow Jones is showing bearish breakdown possibilities. The S&P 500 is somewhat in the middle, looked at below in an apples-to-apples manner with a set of Fibonacci retracements.
  • The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.

US stocks continue to trade on their back foot, holding on to last week’s sell-off as concerns about Chinese property lender Evergrande came into the equation. Last week saw four consecutive days of selling in S&P 500 futures, with prices putting in a bounce yesterday, leading into this morning’s inflation data.

And, for the first time since October of last year, headline CPI printed below the expectation for the monthly read, with MoM inflation printing at .3% versus the expected .4%. On an annualized basis, however, the expectation was matched at 5.3% but, still, this represents a moderation from last month’s 5.4%, giving a bit more credence to the Fed’s take that inflation is transitory, to some degree.

Just a couple of months ago, a below-expectation CPI read would probably have been a boon for stocks. And for about an hour after the CPI release this morning, it was, as US equity futures were bid into the 9:30 open. But after equity markets began trading for the day, US stocks turned back-around towards the recent lows and continue to hold there as we progress through the morning.

The lack of bullish follow-through can be perceived in a couple of different ways: Perhaps there’s some overriding concerns about Evergrande and the prospect of contagion in the Chinese and, in-turn, maybe even the global financial system. Or, this may just be a case of tightening up ahead of the September FOMC rate decision, with an abundance of caution in the event that the Fed does begin to roll out tapering plans.

Most likely, there’s some combination of both that are weighing on stocks near-term, and the fact that a fresh all-time-high was set less than two weeks ago and we remain less than 3% off of that marker suggests that this is more of a pullback at this point. Current resistance on the S&P 500 is continuing to show at the 61.8% Fibonacci extension of the July pullback move. That level caught the high yesterday morning and has yet to be taken-out. On the support side, there’s a bullish trendline projection that currently plots to around 4427, and that would be the ‘s1’ level, as of right now. But a little deeper is a more attractive zone, taken from around 4364-4384.

To learn more about Fibonacci projections, check out DailyFX Education

S&P 500 Daily Price Chart

Chart prepared by James Stanley; S&P 500 on Tradingview

On a shorter-term look and for reference with the following charts I’ll look at in the Nasdaq 100 and the Dow, a Fibonacci retracement has been applied to the major move spanning from the August 19 low up to the September 3 high. Notice that as of now, the S&P 500 is grasping on to the 50% marker of that move.

S&P 500 Four-Hour Price Chart

Chart prepared by James Stanley; S&P 500 on Tradingview

Nasdaq 100 Threatening Breakout

Given the rate sensitivity derived from this morning’s inflation print, the Nasdaq 100 is looking a touch more bullish than the S&P 500. Drawing a Fibonacci retracement over the same major move, spanning from the August 19th low up to the September 3rd high, and the Nasdaq 100 didn’t even test the 38.2% retracement as the S&P 500 continues to grind the 50. And this morning, even with the S&P 500 selling off a bit more, the Nasdaq 100 has firmed up to a key point of resistance, taken from the 23.6% Fibonacci retracement of that same major move.

This makes the Nasdaq 100 as a touch more attractive for bullish US equity plays at the moment.

To learn more about Fibonacci, check out DailyFX Education

Nasdaq 100 Four-Hour Price Chart

Chart prepared by James Stanley; Nasdaq 100 on Tradingview

Dow as the Ugly Duckling

At this point, the Dow appears fairly weak and it’s carrying some breakdown potential. If looking to post short plays on US stocks, this is an index to check out.

While both of the above indices are holding retracement levels from the August 19th – September 3rd major move, the Dow is right back down to the lows. And that August 19th low was tested through last Friday but, so far, it’s held support.

A bearish breakdown here could bring a fast move lower as there’s a dearth of nearby, recent support between 33,623 and Friday’s swing-low.

Dow Jones Four Hour Price Chart

Chart prepared by James Stanley; Dow Jones on Tradingview

— Written by James Stanley, Senior Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX