Stock market under pressure – what next ?

A sharp shift in sentiment, traders finally turned their attention to the Fed and potential continued tightening.
Another major fundamental is liquidity being withdrawn as the Fed shrinks its $8 trillion-plus balance sheet by nearly 100 billion dollars per month. The two biggest buyers of US government bonds – China and the Fed – are out for now. The consequences are higher interest rates and tight cash, which could put pressure on long-dated assets like unprofitable growth stocks, the same stocks that have been soaring so far in 2023.

Furthermore, fiscal stimulus from the US government has ended and is unlikely to be any more due to the impasse in Congress – Republicans are threatening to impose a debt ceiling later this year.

Historically, stocks usually don’t bottom out before the Fed stops hiking, so the stats are against traders right now.

The Market Profile chart of the US Broad Index (SP500) shows a strong increase in volumes in the relatively broad 3850 – 4000 zone. This suggests that the current price movement through this zone will be difficult and slow and the zone is potential support.

The uptrend is still valid, but given the negative fundamentals, now is the right time to consider alternative scenarios. SP is close to the local support zone 3930 – 3980, a retest of the broken trend line and moving averages. Given high volumes in the area and the fact that the market is oversold on the smaller time frames, it is very likely that the price will reverse near the local support and have a new rise, which will also be a confirmation of the still valid up trend. The most aggressive traders can use the local support zone as entry levels with the potential to test resistance at 4200 – 4260.

However, the alternative scenario is not to be ignored either. A daily close below 3880 will trigger a potential test of the 3750 – 3800 zone, and given that this is the lower limit of the high volume zone, it is possible that the index will head straight for the 2022 lows. In any case, a close below 3880 on a daily basis would be a signal that a new downward cycle could develop, which could take the SP500 initially to the 3150 – 3300 zone.