Talk of Fed’s Taper May Cap Strength in S&P 500 (SPX)

Despite the new all-time high in S&P 500 (SPX), the potential tapering by the Fed may cap the strength in US Indices. The Fed’s chair Jerome Powell will speak this Friday at the annual gathering in Jackson Hole. He is expected to reveal details on how and when the Fed will start to taper its bond buying program. Mr. Powell has indicated last time that the Fed has started to internally discuss tapering. However, the Fed still lacks the specifics on the time and scale. The situation is further complicated with the current rise in Delta variant. It’s likely that the Fed will not announce a taper at Jackson Hole. More likely is for the Fed to announce a taper in November or December at a gradual pace.

If the Fed sounds ambiguous about the time and scale, it could support to the Indices. On the other hand, if The Fed surprises the market by announcing a taper or dropping a clear hint on the pathway, the strength in Indices may prove temporary.

SPX Daily Elliott Wave Chart

S&P 500 (SPX) shows two bullish cycles from March 2020 low and September 24, 2020 low. The cycle from September 24, 2020 low is quite mature and should end as 5 waves impulse with a few more highs. Near term, there is an incomplete bullish sequence from July 19, 2021 low. The Index likely sees 2 more highs before ending cycle from July 19, 2021 and at the same time September 24, 2020 low. Once cycle from September 24, 2020  low ends, the Index should see larger pullback in 3, 7, or 11 swing in wave 4 to correct this cycle.  There’s a likelihood that the pullback in wave 4 happens on the third / fourth quarter of this year due to the potential threat of tapering. Thus, the new high in US Indices is just as an extension within an almost 1 year old cycle.