The S&P 500 Weekly Forecast: More downside left to play for, target 61.8% Fib

An unwind of a huge buying spree was contributing to the sell-off, with the Wall Street Journal reporting on the $50bn bet on the sector by Japan’s SoftBank which helped to drive the tech stocks and stock markets to new highs.

As for the performers, stock of Apple plummeted 7%, while Facebook and Amazon shed more than 6%. Google parent Alphabet and Microsoft both fell at least 4%. Zoom lost another 4% since Thursday's sell-off.

While the correction has been sharp, in reality, its a drop in the ocean. All of the companies just mentioned are still much higher for the year where we have seen consecutive days of some 4% gains in some stocks such as Apple. 

The S&P 500 had been up in nine of the last 10 trading sessions so a period of profit-taking is to be expected. 

The drop in the benchmarks came on eth same day that the US reported its Nonfarm Payrolls which showed that employers had added another 1.4m job in August.

The unemployment rate has dipped below 10% to 8.4%, the first time it has been below 10% since the pandemic hit the US.

If this was just a tech shake out, then the data should be encouraging for investors as we come out of the summer lull and move towards a very heated autumn season.

The fourth quarter will be the grand finale of 2020

One of the historical realities of the stock market is that it has typically performed poorest during the month of September.  

Some have dubbed this annual drop-off as the "September Effect.

While the September Effect is a market anomaly, unrelated to any particular market event or news, we have just seen the sharpest decline since June, the Fed confirming before their September meeting a new tactic which many believe could be detrimental to the economy in the long run, the coronavirus spread and uncertainties of the US elections. 

Providing the coronavirus threat dissipates with continued hopes that the effects of social distancing, a vaccine and herd immunity will eventually pay off, the market's attention will soon be firmly on the US elections. Opinion polls suggest Joe Biden has a commanding lead over President Donald Trump, but with two months to go, there are plenty of things that could change that situation.  

On the lookout for high-frequency data  

Meanwhile, high-frequency data will continue to be monitored.  

The US manufacturing sector has been experiencing a robust V-shaped recovery and most areas of service sector activity are improving also.

However, we have started to see data that suggests the post-reopening surge in activity began to moderate in July.

With the pandemic continuing to create most of the challenges, it will be a thorn in the side for Wall Street if this is a theme that will continue for August and the rest of the year. 

For the week ahead, eyes will be on the US Consumer Price Index as well as the US Jobless Claims. 

The core CPI probably rose fairly strongly again, led by a COVID-related surge in used vehicle prices.

However, there could be less of emphasis here considering that the Fed has already said they will allow the economy to run hot before increasing interest rates.  

Nonetheless, the data rose strongly in June and July as well, but that followed a plunge. Through the COVID-related volatility, we believe the trend has weakened, led by rents.

We estimate core prices remained at 1.6% y/y in August. That is up from 1.2% in June but down from 2.4% in February,

analysts at TD Securities explained. 

As for Jobless Claims, the analysts noted that last week's plunge in claims, to 881k from 1011k, was due entirely to a switch to additive from multiplicative seasonal adjustment factors. 

We think the new system is more accurate, but the plunge is just a technical change, and the level is still historically high. Despite the high level, payrolls have been recovering, but the pace has been slowing.  

S&P 500 technical analysis

The weekly chart above shows how the price has held at a weekly structure, however, the daily chart below is far more compelling.

As can be seen, the price remains below a daily structure as well as the 21-day moving average.  

That wick could well be filled with bearish price action in the coming week if the resistance rejects the bulls.

A break below the wick and subsequent retest of structure opens the risk for a run to a 61.8% Fibonacci retracement target.