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The benchmark S&P 500 index wiped out a month’s worth of gains on Friday, as news of a new strain of Coronavirus sapped investors’ appetite for risk. The Omicron variant was first detected in several nations in southern Africa and has since surfaced throughout Europe and parts of Asia. This has seen various governments tighten restrictions on travel to southern Africa, with the UK adding four more nations to its red list and the US upgrading its travel advisory list to warnings.
Given the devastating impact of the Delta variant of Covid-19 on economies around the world, a period of sustained risk aversion could be on the cards for the remainder of the year. Especially as we begin to approach the Christmas holiday period, which tends to see investors square up their positions and portfolios in preparation for the new year. That being said, there is a possibility that Friday’s move was compounded by holiday market conditions in the US, which may allow for some form of stabilization in the week ahead.
Source – Trading Economics
In terms of economic data, market participants will be intently watching the upcoming non-farm payrolls report due for release this coming Friday. The world’s largest economy is expected to have added 550,000 jobs in November, resulting in an 11 consecutive month streak of gains in overall employment. A flurry of PMI figures should also show a strong rate of expansion in both the manufacturing and services sectors. Counterintuitively, robust economic data may undermine risk appetite in general by providing further ammunition for the Federal Reserve to begin winding back its emergency measures faster-than-expected. With that in mind, investors would be wise to display a degree of caution in the week ahead as markets digest the possibility of an accelerated tapering process and the threat of renewed restrictions in light of the Omicron variant.
Chart prepared by Daniel Moss, created with Tradingview
The S&P 500 appears at risk of a more extended pullback after price formed a Bearish Engulfing candle that pierced through the 9-, 21-, and 34-day exponential moving averages.
Indeed, with the RSI plunging back below its neutral midpoint for the first time since mid-October, and a bearish crossover taking place on the MACD indicator, it seems that bears may be in control in the week ahead.
A retest of former resistance-turned-support at the September high (4549.5) looks likely in the near-term, with a break below bringing the sentiment-defining 100-day moving average into the crosshairs.
However, if support at 4550 remains intact, a rebound back towards the all-time high set on November 22 (4740.5) can’t be ruled out.