50-day in Play

Futures markets indicate a continuation of Friday’s sell-off.

Last week the S&P 500 managed to close lower than the prior week. It appears a bit of a trader’s pull-back may be in order. Technical indicators suggest the 50-day moving average will likely be tested early this week. That would be around the 4239, or a drop of roughly two percent.

This would not be particularly disorderly in the current pricing pattern. Nor does it suggest anything catastrophic (at least not yet). It simply suggests pricing things have been over-bought for a couple of weeks and traders want to lock some profits.

The larger issues are still in play. Fed behavior matters. But the conversation is shifting. Does the economy have a handle on inflation or not? Is this really transitory? And does the Fed have enough bullets in the gun to be effective?

These are big questions. The answers likely won’t be known until after the fact. So, for now, follow what the markets are saying. For the week, it looks like slightly risk-off, but in the larger picture, there is still little-to-know return in the risk free space (in fact, it can be argued that inflation makes true risk-free returns negative).

Looking at the numbers, the key area looks to be the 50-day price average for the SPX. Note this level overlaps with the week-of-June-21 low in the 21-MALG line (illustrated below). Essentially, the set up is for an overlap of the prior price wave — a dip crossing below this point, indicating a likely completion of a correction pattern. The question will be, do prices recover and go on to challenge new all-time highs from this point, or do they break lower.

This is a question for more data, but current indications are the prices will pull-back to these levels, find footing there, and move back towards the previous highs to re-test resistance.

For the week, look for a potential test of the 50-day pricing average early, with prices likely dropping below 4260, and a decent chance of price recovery moving back towards the 4350’s by week’s end.

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