Disclaimer: I am not a financial advisor and the following article is for educational purposes only. Trading and investing is high risk/reward profession and you should not Trade/invest money that you are not willing to lose.
Fundamental Analysis
Fundamental analysis is often considered a complex subject, but I believe in keeping it simple for traders to achieve better long-term trading results. In my approach to fundamental analysis, I primarily focus on a few key factors: unemployment data, core inflation rate, and the Federal Reserve’s interest rate decisions. Currently, the core inflation rate has remained stagnant at 5.5% over the past few months, while the unemployment rate remains at a low level. Consequently, there is uncertainty regarding the Federal Reserve’s stance on interest rate reduction. Taking these factors into consideration, the fundamental state of the market remains uncertain.
Technical analysis:
Let’s start with monthly chart,
The monthly chart appears disorganized. Let us transition to a broader time frame of 6 months to ascertain if we can attain a more coherent depiction.
Looking at the 6-month chart, it is evident that the market is currently in a bearish state, as it has breached and closed below the opening price of the JUL 2021 6-month candle. To ascertain the significant support and resistance levels, we will employ a price action and market structure approach. Notably, the strong support for the 6-month range is observed within the range of 293.94 and 323.80, while the resistance levels are identified between 428.87 and 479.98.
Upon closer examination of the chart, it becomes evident that during the July 2022 session, the market had already tested the level of 428.87. Presently, the market has retraced back to this resistance level. If you are a long-term trader and have a belief in the bearish outlook for the upcoming years, this presents a favorable opportunity to initiate a short position. However, it is worth considering whether there might be a more favorable risk-to-reward ratio available. To gain further insights into the market behavior, let us shift our focus to lower time frames.
Specifically, let’s analyze the monthly time frame for a broader perspective.
Monthly time frame:
According to the analysis of the monthly time frame, the identified strong resistance and support levels lie within the ranges of 462.07 to 435.04 and 350.21 to 319.80, respectively. Additionally, a weaker support level can be observed between 408.77 and 398.79, as indicated by the red line on the chart, which represents a cluster of lows. This consolidation presents an ideal scenario for market liquidity hunting. Considering the lack of upward momentum, it is highly probable that the market may reverse within the range of 435.04 to 462.07, potentially targeting the liquidity beneath the monthly lows highlighted by the red line. Eventually, this could lead to a breakthrough of the monthly swing low at 348.11, aligning with our previous bearish prediction from the 6-month time frame.
Now, let us delve into the weekly and daily time frames to assess whether any trade opportunities are available.
Weekly Time Frame
Upon analyzing the chart, it becomes apparent that the market is currently approaching the weekly swing high at 431.73. However, it is advised not to adopt a bullish stance if this level is surpassed. As discussed earlier in the context of the monthly time frame, the strong resistance level at 434.93 is in close proximity to the weekly swing high. As indicated in the chart and supported by the higher time frame analysis, there is a favourable opportunity to execute a low-risk trade by taking a short position between the levels of 434.93 and 462.07. The target profit for this trade would be the swing low at level 348.11, while the stop loss is set at 462.07. Consequently, the risk-to-reward ratio for this trade would be 1:3.22.
Now, let us examine the daily time frame to assess whether any potential trading opportunities are present.
Daily Time frame:
There appears to be a trade opportunity if the market retraces within the range of 422.58 to 416.36 before breaking the swing high level at 431.73. This provides a low-risk trade opportunity with a reward-to-risk ratio of 2.25:1. To execute this trade, one can consider buying at the level of 422.58, with a stop loss set at 416.36, and a profit target of 435.
Conclusion:
In conclusion, considering the stagnant inflation data over the past few months, it becomes challenging to predict how the Federal Reserve will respond in the future. Consequently, the fundamental analysis remains within a range of uncertainty. During such times, technical analysis can prove to be beneficial in identifying low-risk trading opportunities. Based on the analysis conducted, the overall state of the S&P 500 index indicates a bearish outlook, emphasizing the need for caution when considering long positions, which should be approached with high risk awareness.
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