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S&P 500 Index May Extend Slide Lower Despite Senate Passing Aid Bill

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S&P 500 Index, Coronavirus Relief-Package, US Hospitalizations, End of Year Flows – Talking Points:

  • Equity markets fell during APAC trade as a new strain of Covid-19 in the UK notably weighed on market sentiment.
  • Risk assets may continue to come under pressure in the near term despite the Senate passing a much-needed fiscal aid package.
  • S&P 500 index at risk of further losses after sliding back below key support.

Asia-Pacific Recap

Equity markets fell during Asia-Pacific trade as investors mulled coronavirus developments and a flurry of lockdowns and travel restrictions.

Australia’s ASX 200 index dropped 1.05% despite an unexpected rise in retail sales, as New South Wales recorded an additional 8 cases of Covid-19, bringing the state’s total to 90. Japan’s Nikkei 225 and Hong Kong’s Hang Seng indices also plunged over 1%.

In FX markets, the haven-associated US Dollar and Japanese Yen continued to outperform their major counterparts, while the cyclically-sensitive Australian and New Zealand Dollars lost ground. Gold and silver slid lower as yields on US 10-year Treasuries dipped 2 basis points to 0.92%.

Looking ahead, third-quarter GDP figures out of the US headline the economic docket alongside consumer confidence figures for December.

S&P 500 Index May Extend Slide Lower Despite Senate Passing Aid Bill

Market reaction chart created using Tradingview

Senate Passing Aid Bill May Fail to Buoy S&P 500

The benchmark S&P 500 index fell just shy of 2% lower overnight before recovering lost ground late in the Wall Street session, as the implementation of fresh travel restrictions – in response to a new, more infectious strain of Covid-19 in the UK – undermined market sentiment.

The index may extend its slide lower in the near term despite news that the Senate has passed a much-needed coronavirus relief package, as local health outcomes also continue to deteriorate.

The $900 billion relief plan, which includes $600 stimulus checks, $300-per-week in enhanced unemployment benefits, funding for vaccine distribution and $300 billion in aid for small business, is expected to be signed into law by President Trump in the coming days.

S&P 500 Index May Extend Slide Lower Despite Senate Passing Aid Bill

However, with this news more or less priced in, and the US averaging over 200,000 Covid-19 new infections a day, regional risk assets may continue to come under pressure.

California Governor Gavin Newsom painted a grim picture of the situation in the nation’s most populous state, warning that more than 90,000 people could be hospitalized by mid-January if the current surge in infections isn’t supressed. The state currently has over 18,000 patients in hospital and only 2.5% of ICU beds remaining state-wide.

The notable drop-off in trading volumes could also be a key factor driving stock prices lower ahead of the Christmas break, with investors rebalancing their portfolios as 2021 gradually draws to a close.

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S&P 500 Index Futures Daily Chart – 3700 Mark Capping Topside Potential

S&P 500 Index May Extend Slide Lower Despite Senate Passing Aid Bill

S&P 500 index futures daily chart created using Tradingview

From a technical perspective, the benchmark S&P 500 index looks at risk of a short-term pullback, as price fails to gain a firm foothold above the 78.6% Fibonacci (3710).

Bearish RSI divergence, in tandem with a bearish crossover on the MACD indicator, suggests that the path of least resistance is skewed to the downside.

Sliding back below the November 9 high (3668) would likely generate a pullback towards the December 11 low (3621), with a break below bringing the September high (3587) into focus.

Alternatively, remaining constructively perched above 3650 could allow buyers to drive prices back towards the yearly high (3724).

Clearing that on a daily close basis is needed to signal the resumption of the primary uptrend and carve a path to test the psychologically imposing 3800 mark.

S&P 500 Index Futures 4-Hour Chart – 50-MA Guiding Prices Lower

S&P 500 Index May Extend Slide Lower Despite Senate Passing Aid Bill

S&P 500 index futures 4-hour chart created using Tradingview

Zooming into the 4-hour chart bolsters the bearish outlook depicted on the daily timeframe, as the S&P 500 breaks back below the trend-defining 50-MA (3678).

With the RSI U-turning at its neutral midpoint, and the MACD indicator sliding into negative territory, further losses appear in the offing.

Breaking convincingly back below the November 9 high (3668) would probably trigger a more extensive correction and bring the sentiment-defining 200-MA (3621) into the cross hairs.

On the other hand, pushing back above 3680 could inspire a retest of the monthly high (3724), with a break above needed to clear a path for price to challenge psychological resistance at 3750.

S&P 500 Index May Extend Slide Lower Despite Senate Passing Aid Bill

The IG Client Sentiment Report shows 37.38% of traders are net-long with the ratio of traders short to long at 1.68 to 1. The number of traders net-long is 1.49% higher than yesterday and 14.30% lower from last week, while the number of traders net-short is 0.18% lower than yesterday and 4.73% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests the S&P 500 may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed S&P 500 trading bias.

— Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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