The US Indices Are Drifting Slightly Lower As The Recession Fear Rises

Recession Fears and S&P Chart Update

S&P 500 started to look heavy on the Daily and H4 charts today. In this post, we will take a look at the price action and patterns that are fitting perfectly the macro situation with the ongoing Fed decision on May 3rd. 

As we can see from the chart below the price on the daily chart ranges for quite some time and can’t pretty much make it to the upside. That’s a signal that the bull market is probably exhausted and bears are trying to get control here. The obvious reason is the Fed’s decision.

The chart below shows the YoY percentage change in inflation-adjusted construction spending and industrial production. The first chart starts in 1995 and shows the long term, and the second chart zooms in on the past five years. The deceleration over the past quarter is apparent:

One of my preferred indicators, which is more narrow than most indicators I track, is heavy truck sales. They’re rolling over in rate of change terms and likely about to head negatively by mid-year. Not every negative period results in a recession, but they are indicative of severe slowdowns or recessions:

Temporary help services, which are among the most cyclical parts of the total labor market, have rolled over into recession territory:

And on top of everyhing above, we currently have the deepest yield curve inversion in four decades.

As the recession fear deepens, there is still drama with the banking liquidity among small and mid-sized banks that could drive a bigger-than-expected panic. This panic can create a 2nd wave of bank failure and a potential liquidity boost from the Fed. That will be positive for the markets, as it could also be translated as a “Fed forced pivot”.

On the other hand, the inflation is still high. The Fed governor Jerome Powell assured us that they do not plan any changes on their MP until they don’t reach their 2% long-term inflation goal. Oh, yeah, sure! I say.

If the central bank decides to QE, that’s pro-inflationary, if they don’t react and just let those unprepared banks collapse, then they may risk deepening the problem worse. 

I expect the Fed to increase the interest rate by another 25 bp and announce that this might be the last rate hike, but not pivoting. The argument for that is this is the last rate hike, but not planning to decrease interest rates soon, in order to reach their long-term 2% inflation goal. All right! 

They might no plan it, but they could get force it. Anyways, Let’s focus on price details here. 

As I mentioned above the daily chart is looking “heavy” to me. The last peak failed to touch the highs from early February this year, as the price is forming some unconfirmed reversal pattern. If confirms then we might have the early stage of Head & Shoulders patern forming here. 

Switching to lower time frame, like on H4 chart, we can see more details on how the “right shoulder of the Daily potential Head & Shoulder Pattern” is forming.

It is identical to the Daily chart, so both agree that the Bulls might lose the batter here. If the price confirms the H&S on the H4 chart, that would be a valid signal for the H&S on the daily chart. 

Getting back to the fundamental scale, with liquidity shrinking for the last 3-weeks, the risk of the Fed sounding more hawkish than expected is still there. I expect worse earning reports this season, and the upcoming earning season is not looking well, which is bearish for the markets. 

 Summarizing that: 

Even though we have a lot of reasons to believe that the bearish case for the stock market is more likely, we should be careful with our trading decisions due to highly sensitive markets nowadays. Things may change very fast in this volatile environment. 

We will discuss more about the current macro situation, the US stock market, China, the Debt Ceiling issue, Gold, Energy and many more on the  XM Live Trading and Education sessions next week starting on Monday from 7 am GMT!

You can also take advantage of my Private Trading and Education Room here. 

The goal of this post is only to inform and educate the website visitors and not to give any trading or investing advice! Make sure you learn the risks of trading and investing in the financial markets before you take any trading decision. 

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