This article is written exclusively for Investing.com
Following the big reversal on Thursday, the key question is whether the S&P 500 and other US indices have bottomed out, or will it prove to be yet another short-lived, short-covering, rebound.
For what it is worth, I am leaning toward the latter view—even if we see some moderate further upside follow-through today. So far, the bulls have managed to hang in there and safe haven gold has remained undermined following its volatile session on Thursday, to suggest that at least for now, the bears haven’t come out in force. But that could change.
Indeed, it is not the first time we have seen the indices print daily hammer candles, only for the bulls to refuse to show up in a decisive way. They fear that this could be yet another bull trap. What the bulls, who are still on the sidelines, would like to see next is some follow-through and the breakdown of the series of lower highs first. Only then can they claim more confidently that the downtrend has ended.
What makes this particular hammer candle less appealing than it appears is the fact that it finished bang on the resistance zone circa 4290. The area around this level had previously offered consistent support and it is imperative that the bulls recapture it. Failure to do so would keep the bears in control.
The bulls have reclaimed the January low at 4212, which is now going to be key, insofar as today’s session is concerned. If this level breaks down and there is acceptance below it, then the stops that would be resting below Thursday’s low at 4101 would be in trouble.
From a macro point of view, it is all about everything happening on the ground in Ukraine and news from Russia and the West as they hit each other with sanctions. You can understand why sentiment remains cagey. As the confrontation gets closer to the capital, Kyiv, causalities could unfortunately rise. This may well bring in more sanctions from the US and its NATO allies and further retaliation from the Kremlin.
Meanwhile, although oil prices have retreated, they still remain dangerously high. Inflation concerns could come to the forefront of investors’ minds in the coming weeks, raising the prospects of a faster rate hike from the Fed than expected.
In the immediate term, it is all about the core PCE Price Index today, which is the Fed’s favorite inflation measure. There is the potential for equities to drop if it shows a hotter-than-expected reading. Beyond this, there is the weekend gap risk, which the bulls may also take into account in terms of not going all out today.