How Will Interest Rates Influence the S&P 500?

When markets started trading at the beginning of the year, one of the biggest questions on the minds of investors was: When will the Federal Reserve start raising interest rates, and what will be the overall impact on stock markets? There were widely varying forecasts on the total number of increases in interest rates that would be enacted at the Fed. Some forecasts were generally dovish, suggesting that interest rate levels might be at only 1% or 2% at the end of this year. Other analysts were much more hawkish, suggesting that interest rates could be as high at 6% by the end of this year.

So while these upper estimates seem unlikely at this stage there is still scope for higher interest rates as the US economy continues to press forward, show growth, and post declines in the national unemployment rate.

With all of this in mind, it quickly becomes clear that the Fed will not be able to hold interest rates at 0% forever, and that sooner or later the Fed will need to change policy in ways that are more in line with historical tendencies.

"Of course, any increases in interest rates will make it much more difficult for stock markets to perform in a strongly bullish fashion because consumer credit will be more expensive and corporate earnings are likely to suffer as a result, said Michael Carney, market analyst at Teach Me Trading. "Because of this, it is important to have a solid understanding on the important support and resistance levels in assets that are most closely tied to the S&P 500. Perhaps, the most popular selection in this regard is the SPDR S&P 500 Trust ETF (SPY), so here we will take a closer look at the price history in the ETF in order to determine where market trends are likely headed next.


SPDR S&P 500 Trust ETF (NYSE: SPY)

Critical Resistance: 210

Critical Support: 198.80

Trading Bias: Buy on Dips
Trading Chart

(Chart Source: CornerTrader)

S&P 500 / SPY - Stock Trading Strategy: Prices are starting to roll over at the upper levels, so we could be in for a deeper retracement in the short term. Watch for support near 198 to contain prices, and this area can be used for buying in dips strategies.

It is still clear that the uptrend in SPY remains intact, so traders should be looking for ways to buy into the ETF while still maintaining acceptable risk to reward ratios. From a support and resistance perspective, traders should be looking at historical demand in the 198 region. Any dips here provide access to better prices and reduce some of the risk that would otherwise be associated with buying any asset near its record highs. The Daily MACD reading is still in positive territory but this also looks as though it could be changing within the next week or so.

So, if we start to see the MACD reading turn into negative territory along with breaks of important support levels, we can start to expect a deeper retracement. If, however, the MACD is able to hold in its positive position and bounce off of 198, we would likely see another retest of the old highs.
By Richard Cox
Richard Cox is a university teacher in international trade and finance. Lessons in macroeconomics and price behavior in equity markets. He writes for,,, TheStreet, Seeking Alpha, and the Motley Fool. Investing strategies in these articles are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally suggestive of time horizons of one to six months.

Copyrighted 2016. Content published with author's permission.

Posted in ...