Indices Weekly Outlook: S&P 500 breaks support as wobbling AI trade weigh on stocks

The S&P 500 bounced of its session lows on Friday after a bruising day, but retained much of its weakness into the close as renewed weakness in technology shares put the AI trade back under the microscope. A big 30% drop in Intel shares after its earnings results triggered the latest leg lower. Looking ahead, Tuesday’s midterm elections and Friday’s jobs report will be the main event risks. With key support now broken, the near-term S&P 500 outlook is tilted to the downside.

 

• The S&P 500 has broken support between 7,620 and 7,632 and slipped below its 21-day exponential moving average.
• A Democratic clean sweep in Tuesday's midterm elections could revive concerns over government shutdowns and the debt ceiling.
• Hawkish central banks and Friday's payrolls report leave little room for a relief rally built on lower rates.

 

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The AI trade loses its footing

 

Last week’s latest sell-off in US stocks was led by technology. Intel's huge plunge fall after its earnings results has revived concerns around the AI trade, and the selling has quickly spread into the broader market, leaving the major indices on the brink as we look forward to a new week.

 

The tech sell-off has also encouraged some safe-haven demand for Treasuries, dragging yields lower. That is a telling sign of how quickly sentiment has soured, and it has weighed on the dollar too, which has tended to come under pressure whenever the technology sector does.

 

A lot will therefore depend on the direction of the AI trade and the upcoming earnings releases. Without a convincing recovery in the big technology names, it is hard to see the index regaining its footing in a hurry.

 

Midterms add a layer of political risk

 

Tuesday's US midterm elections could have important implications for the stock market. A split or Democrat-run Congress would make it harder for President Trump to achieve his goals, whether that is domestic legislation or foreign policy.

 

A full Democratic sweep, in which the party wins control of both the House of Representatives and the Senate on the same night, is increasingly likely. That would severely restrict the president's agenda and potentially raise concerns over government shutdown risks and debt-ceiling negotiations. The S&P 500 is the index I would watch most closely should political uncertainty start to build.

 

Hawkish central banks offer little relief

 

The macro backdrop is not especially helpful either. The Federal Reserve kept interest rates unchanged at its meeting last week, but a December rate hike is highly likely. US data has given the Fed little reason to sound more dovish, with third-quarter GDP expanding by 3.4% and core PCE inflation rising 0.3% month on month in September.

 

Rate hike expectations are building elsewhere too. The Bank of England is expected to raise rates to 4% on Thursday, as energy prices continue to climb because of the war in the Middle East. Friday's non-farm payrolls report is the highlight of the week for US investors, and a strong print would cement expectations for a December hike, which is hardly the backdrop for a sustained rebound in equities.

 

Before wrapping up, let's have a quick look at the chart.

 

Technical S&P 500 forecast and key levels to watch

From a technical analysis point of view, the S&P 500 has broken key support between 7,620 and 7,632. That region was previously resistance before it offered support on the retest, and now that we have a daily close below it, this is another technically bearish sign.

 

 

The S&P 500 index has also broken below the 21-day exponential moving average and taken out a short-term bullish trend line, suggesting the path of least resistance is to the downside, at least in the short term.

 

Should the selling pressure continue this week, then 7,500 could be the next stop, an area that has previously acted as both support and resistance. A deeper correction could bring the 200-day moving average into focus, around 7,325, below which the summer lows also come into play.

 

On the upside, the broken support around 7,620 is the first and most important resistance to watch, followed by Thursday's low at 7,675. As things stand, the near-term forecast remains tilted to the downside.

 

Frequently Asked Questions

Why is the S&P 500 falling?

The S&P 500 has come under pressure after a big drop in Intel shares following its earnings revived concerns around the AI trade. Rising expectations of further rate hikes from the Fed and other central banks have added to the selling.

What are the key levels for the S&P 500?

Support has broken between 7,620 and 7,632, which now acts as resistance alongside Thursday's low at 7,675. On the downside, 7,500 is the next level to watch, followed by the 200-day moving average around 7,325.

What would improve the S&P 500 outlook?

A recovery in technology shares and a move back above the 7,620 to 7,632 area would ease the immediate pressure. Until then, the path of least resistance remains to the downside.

 

-- Written by Fawad Razaqzada, Market Analyst | Follow Fawad on Twitter @Trader_F_R