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Is it safe to buy the S&P 500 index after bouncing from horizontal support?

Mircea Vasiu

S&P 500 bounces from horizontal support at the start of the new trading week. Is it time to go long now? 

The US stock market ended the previous week at its lows, scaring investors. The weekly close put pressure on bulls, especially considering that the selloff was aggressive and broad-based. 

However, the market bounced yesterday. The S&P 500 rallied on Monday as investors hurried to buy the dip. So is it safe to buy the S&P 500 index after bouncing from horizontal support?

The next few quarters may be tricky for stock market investors

Looking at the 4-year presidential cycle, the next couple of quarters may be tricky for stock market investors. Historically, they are two of the weakest, and thus, caution is needed. 

However, it is important to look at what happens next. Judging by what history tells us, long-term investors are waiting for the chance to add more on any meaningful dip. 

How about the technical picture?

The technical picture comes to complement the possible weakness in the upcoming quarters. Indeed, the stock market bounced from horizontal support yesterday, but it might be just that – a bounce. 

The horizontal support appears to be the neckline of a head and shoulders pattern. A daily close below 4,200 would put more pressure on the market, as short-sellers would push for a move towards the measured move. 

As such, one should not rule out a move to 3,600 should the 4,200 support give way. 

What events may move the stock market in the period ahead?

For stock market investors, the focus these days is on three areas: the conflict in Eastern Europe, domestic inflation, and the Fed’s monetary policy. 

The Russia-Ukraine conflict shocked Western nations. The wave of sanctions that followed has a tremendous impact on the global economy, and the stock market cannot remain indifferent. As such, any new developments in the conflict may move markets sharply. 

Inflation runs hot in the US. Some say it has peaked, but we are yet to see the evidence. In the meantime, investors are worried that the central bank’s actions are not enough to bring inflation down from a four-decade high. 

Speaking of the central bank, the market has priced in an aggressive monetary tightening from the Fed. Therefore, any changes in market expectations regarding the number of rate hikes in 2022 may also trigger sharp reactions in the market.