After last week’s Sell Off in Equities – S&P500 bears now in charge?

The S&P500 took a big hit on Thursday of last week, dropping 3.5% while US tech shares and the Nasdaq100 dropped more than 5% - is this the starting point of a deeper corrective move with more bearish attacks to come?

Putting things into perspective: advantage still clearly bullish on the S&P500

In fact, it seems necessary to take a step back and take a deep breath first: while the Nasdaq100 saw its biggest drop since March this year and the S&P500 saw its third biggest decline ever, after setting a new All Time High, by dropping 3.5% (the other two occasions were in November 1991 with a 3.9% drop and September 1955 with a 6.6% drop), we should put these losses into perspective.

Let's just look at the Nasdaq100: despite the massive drop in March with Corona pandemic fears and panic hitting the markets, the US tech index is still up more than 25% in 2020 and is trading more than 70% from its March lows.

That in mind, one may say: "A correction is overdue." Indeed, this could be the case, and here are some key points to consider here

• There has been a very positive performance from the S&P500 in August with gains of 7%
• We know that the last 15 times this happened, the S&P500 ended up higher each time, 3.2% on average
• In the time span from 1950 to today, when it took more than five months to set a new All Time High (like this time, February – August), the average 12-month return for the S&P500 has been 11.4%.

Further, consider the following positive signs

• There was more promising data from the US economy last Friday, with the US unemployment rate dropping back below 10%, coming in at 8.4% against the expected 9.8%
• There is massive monetary support from the FED
• The FED is also willing to allow inflation to run above the FED target rate of 2% for some time as FED chairman Powell said at his speech in Jackson Hole on the 27th of August

With all of this in mind, the mood still seems to be "Buy the dip".

How to trade [SP500] CFD in this environment?

The overall picture for the SP500 CFD remains bullish as long as we trade above the SMA(200) and above 2,950/3,000 points (green rectangle).

A pullback towards the February highs around 3,380 points or lower towards the region around 3,200/230 points, the June highs and the 61.8% Fibonacci retracement from the June lows to the September and All Time highs seems reasonable and is attractive from a risk-reward perspective if we work with a stop loss at 2,950 points and a target around 3,800 points:

Source: Admiral Markets MT5 with MT5SE Add-on [SP500] CFD Daily chart (between April 26, 2019, to September 07, 2020). Accessed: September 07, 2020, at 10:00 AM GMT. Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015 the SP500 CFD fell by -0.73%. In 2016, it increased by 9.54%. In 2017, it increased by 19.42%. In 2018, it fell by -6.24% and in 2019, it increased by 28.88%, meaning that in five years, it was up by 56.9%.

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