S&P 500 falls through key support on hawkish Fed, US-Iran worries

FUNDAMENTAL OVERVIEW

Since Friday, a hawkish speech by Fed Chair Warsh at the Jackson Hole Symposium has kept the S&P 500 and other major stock indices under pressure. Warsh pushed back on the recent easing of financial conditions, and those conditions retightened quickly. Tighter financial conditions dampen expectations for future growth, which naturally weighs on the stock market. The odds of a September Fed rate hike have also risen, and the market now prices in a roughly 67% chance of an increase.

Warsh reiterated that the Fed's focus is solely on inflation and said progress has been slow. In this view, only a soft US CPI report could pull the probabilities below 50% and stop the Fed from hiking at the upcoming meeting. If those probabilities remain at or above 50%, the Fed may be forced to hike anyway, because not hiking would send a dovish signal and ease financial conditions again.

For now, hawkish expectations and the escalating US-Iran war cap the S&P 500's upside. The best case would be a soft US CPI plus de-escalation in the Middle East; the worst case would be a hot CPI with no de-escalation, a combination that could send the market to the July 30 lows.

S&P 500 TECHNICAL ANALYSIS – DAILY TIMEFRAME

The S&P 500 is working its way through support at 7,640. Sellers are likely to press the break with a defined risk above support, aiming for a drop to the channel's lower bound. Buyers, for their part, will want to see price climb back above support to position for a rally to fresh record highs.

S&P 500 TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

S&P 500 TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

On the 1-hour chart, a minor downward trendline marks the bearish momentum on this timeframe. Sellers are likely to keep leaning on that trendline, with risk defined above it, to continue toward new lows; buyers will be looking for a breakout to set up a pullback to the 4-hour trendline.

UPCOMING CATALYSTS

Today's calendar features the US ADP report. Tomorrow brings Fed's Waller, the US Jobless Claims and the US ISM Services PMI. Friday rounds out the week with the US NFP report.