SPX – Are Bears Here to Persist - Further 25% Drop?

19 באוג׳ 2022

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Fundamental indicators::

• GDP – two consecutive negative quarters - technically a recession
  
• CPI - although CPI dropped to 8.5% last month, it is still early to say if this is a sign of reversal, or if it is to stay at high levels for longer period of time
  
• Manufacturing PMI - still above 50 with 52.8 but consistently dropping from its high back in March 2021
  
• Services PMI - sharp fall below 50 at 47.3 which says that service providers registered weaker expectations regarding the outlook for output
  
• New Orders - are contracting by 5.1% in August (Philadelphia Fed)
  
• Unemployment - although at the lowest level with 3.6%, jobless claims are rising for 4 consecutive months
  
• Real disposable income - is not keeping up with high inflation and getting way below the growth trend we've had since 2008
  
• Consumer confidence - the lowest since 1980
  
• US Interest Rate - raised by 0.75 to 2.5%
  
• Libor yield curve - inverted from March 2023 peaking at 3.78% and dropping since then, which is diverging with Fed dot plot
  
• Treasury yield curve – in August we have observed the deepest inversion between 2 and 10 years since 2000, usually a sign of an approaching recession
  
• Conclusion – there are a lot of negative factors in the US and in the global economy as a whole, indicating that there no signs of recovery yet, and although there are short term rallies in equities as markets are trying to predict Fed’s dovish pivot, it is still more likely to correct even further until we have clues of economic recovery. For now, my base scenario is recession and reduction of rates from the fist quarter 2023
  

Technical Analysis (Elliott Waves):

• Main scenario of this idea suggests that we are still observing development of the global growth cycle which is currently at the stage of forming corrective wave 4 (see higher timeframe graph)
  
• From the point of correction during the Great Financial Crisis S&P500 has enjoyed explosive growth with over 600%
  
• Although very rapid, the whole movement can be counted in set of 3 waves, and not impulsive 5 waves, which indicates that an Ending Diagonal is developing (see guidelines for Ending Diagonals below)
  
• We are currently observing the formation of wave 4 of this Ending Diagonal, and specifically the first leg of it which is taking shape of a complex series of zigzags – normally these series are contained within a regression channel
  
• Waves W and X have completed and we are about to see development of wave Y with a target range of $3180-$3400 – a 25% shorting opportunity
  

This is of course one of many possible scenarios and a lot will depend on macro situation of US economy, namely we can expect big moves 26 August with Jackson Hole conference and PCE statistics, CPI on 13 September, and the next Fed decision 20-21 September.

This is a higher timeframe to reflect the full history of S&P500 and to provide full wave count:
https://www.tradingview.com/x/NtW1blxp/

This is the link to the guidelines for Ending Diagonals

What do you think about S&P500 and its short-term prospects?
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