Index in Focus: S&P 500; Inflation and Russia driving the price action

Apart from earnings reports for Q4 from NFLX and FB, the S&P 500 has been trading off 2 major story lines this year:

1. Higher inflation continues
2. Russia’s potential invasion of Ukraine

The Fed has recognized these higher inflation levels, as Jerome Powell stated in the FOMC press conference that the Fed is of the mind that it will raise rates in March.  Since then, inflation hasn’t let up, with both January CPI and PPI coming in at higher levels than expected. In addition, St Louis Fed President Bullard (hawk) has been the Fed member making headlines, suggesting that the Fed raise key interest rates by 100bps by July 1^st.  This would suggest either a 50bps hike at one of the meetings or an inter-meeting hike.  According to the CME Fedwatch Tool, markets are currently pricing in a 58% chance of a 50bps hike at the March meeting.

What is inflation?

From the very beginning Russia has said they have no intentions on invading Ukraine.  However, they have been building troops along the Russia/Ukraine border for the past 2 months, to the tune of over 100,000.  In addition, Russia just finished military exercises in Belarus.  However, on Tuesday, Russia agreed to return some troops to their bases once exercises were complete and that Russia would continue to have discussions regarding its security.  As a result, the S&P 500 is was up over 70 handles at one point during at day.

Everything you need to know about the S&P 500

But will Tuesday’s bounce in price continue higher or will seller’s return?  The S&P 500 had been moving higher in a descending wedge formation since the Fall of 2020, when price was near 3210.  On January 5^th, price made an all-time high at 4820.2 and has since pulled back.  On January 18^th,  the large cap index broke through the bottom trendline of the wedge and retreated to the 38.2% Fibonacci retracement from the Fall 2020 lows to the January 3^rd highs, near 4222. The S&P 500 then bounced and appears that it may be forming what may be an AB=CD pattern.  If the pattern plays out, the target is below the 50% retracement level of the previously mentioned timeframe near 4000.

Source: Tradingview, Stone X

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On a 240-mintue timeframe, the recent bounce in the S&P 500 reached the 61.8% Fibonacci retracement level from the January 3^rd highs to the January 24^th lows near 4591.7 and pulled back.  Once price broke the neckline at 4447, a double top was formed.  The target for the double top is just above the horizontal support at 4271.  Further support is at the January 24^th lows at 4222 and then the 50% retracement from the Fall 2020 lows to the January 5^th high near 4027 (see daily).  Horizontal resistance isn’t until the recent highs at 4591.7.  If price breaks above, the 50 Day Moving Average sits at 4607 (see daily) and then the January 5^th highs at 4820.2.

Source: Tradingview, Stone X

Equity indices have been volatile since the beginning of the year.  Most of the reason has to do with inflation and a possible Russian invasion of Ukraine.  With the next FOMC meeting not for another month and Russia pulling troops back, the focus will be on the headlines.  Any signs that inflation may be increasing faster than it already is, or that Russia may be on the move again, and the S&P 500 should be in for more volatility ahead!

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