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FOREX: S&P500 Under Assault Ahead of NFPs - Trade or Fade?

February 5, 2014

Research Team

The S&P500 is down more than 5.2% since the start of 2014 with 1.7% of those losses sustained just this week/month. Is it time to trade or fade this correction in stocks? A compelling case be made on both sides. If the FOMC remains committed to its lax accommodative approach, it's likely that this downturn could prompt the central bank to Taper the Taper or refrain from cutting back QE in the March meeting- effectively serving as a backstop on equity prices. Add to that the fact that corporate earning haven't been all that bad and firms continue to sit with hordes of cash on the sidelines: future cash-flow into stocks. On the other hand, rising concerns over the threat of a slowdown in China and the EM story has continued to cub appetite for risk and as US data softens, so do growth expectations from the world's largest economy. Looking at price, the S&P is resting on a trendline that extends to the June 2013 low which currently coincides with the November low at 1740. Momentum does not seem to favor a bounce here despite's today's rally and with NFPs just days away, it's difficult to envision strong inflows into risk. The NFP game plan is as follows: if the index recovers back above the 100-day moving average at 1776 we'll look for stronger resistance at the monthly pivot at 1800. Targets in the event of a break of trendline support are at 1716, 1685 and 1650. If NFPs are weaker than expected, look for growth concerns to keep pressure on broader risk assets and continued weakness in stocks.

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Source: DailyFx

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