Wall Street: the SP 500 could fall to 5600 before rebounding

Selling pressure looks set to persist, but inflation figures will be crucial for Wall Street in the short term.

Wall Street sinks in the face of soaring long-term rates

The S&P 500 seems well on its way to continuing its retracement of recent weeks, according to technical analysis. The index formed a “head and shoulders” pattern by sinking its support to around 5850 points last week following a further rise in long-term bond rates.

Rates on 10- and 30-year Treasuries have risen sharply since the beginning of December, driven by a hawkish pivot from the Fed and stronger-than-expected economic data. Long-term rates have even risen to their highest levels since last year following stronger than expected employment figures.

S&P 500 daily price chart – key levels

The S&P 500 could continue its decline up to 5,600 points in the short term

The head and shoulders chart pattern theoretically gives more weight to a continuation of the decline in the short term. The return/risk couple is in favor of bearish strategies below this threshold and the next major supports to watch will be the November low at around 5700 points, then the old resistance from last summer at around 5600 points, even more the latter is reinforced by the presence of the moving average at 200 sessions.

Nonetheless, inflation numbers released this week will likely be crucial to the near-term movement of the S&P 500. Traders are expecting IPPC inflation on Tuesday, then CPI inflation on Wednesday. Greater than expected disinflation could prompt the Fed to adopt a more accommodative stance, which would have the effect of calming pressure on bond yields and temporarily supporting stocks. On the other hand, inflation higher than expected would risk confirming the need for the central bank to maintain a restrictive posture for longer, fueling selling pressure on the financial markets.