Fitch Downgrade

Fitch Rating on 08/01/23  downgraded its U.S. debt rating from “AAA” to “+AA” which  reflects expected fiscal deterioration over the next three years.  The downgrade triggered a sharp drop in U.S. stocks. 

The daily S&P 500 (SPX) chart courtesy of Trading View illustrates the action.

The 08/02/23 decline broke below the 07/27/23 “Key Reversal” bottom and a rising trendline from late May 2023.

Daily MACD is bearish with the Histogram decisively below the “zero” line.

Also note that on 08/02/23 daily RSI reached the level of 53.82% which is lower than the level recorded on 06/26/23 of 66.93%.  This forecasts the SPX could reach its low made on 06/26/23 of 4,328.08.

 On 07/27/23 the SPX had retraced 84% of the decline made in 2022.  Assuming the January 2022 SPX high was the start of a bear market, this is one of the deepest bear market retracements in U.S. history.  An argument could be made that the retracement is an ongoing new bull market with the SPX poised to move above the January 2022 high.

The movements after the 07/27/23 SPX top show that a deep retracement can be a bear market rally.

The SPX 30 – minute chart shows the short-term picture.

After the sharp decline on 07/27/23 the SPX retraced 83% of the decline.  Subsequently the SPX has gone below its 07/27/23 bottom.  Because of the fractal nature of markets, this implies on a daily scale an SPX move below its October 2022 bottom.

The bottom made on 08/02/23 could also mean an Elliott three – wave correction is complete.  This is possible, however daily momentum indicators and the trendline break strongly suggests more downside action.

Very short-term note the 30 – minute RSI and MACD bullish divergences at the 08/02/23 bottom.  This implies a move up at least for the first half of 08/03/23 trading day.

The daily VIX chart also implies the SPX could trend lower.

The VIX topping signal is still valid. Note that on 07/27/23 with the SPX at a higher peak the daily VIX was still above the bottom made on 06/26/23.

VIX broke above a declining trendline.  Daily VIX – RSI and MACD imply a higher VIX which corresponds to a lower SPX.

On 08/01/23 the Dow Jones Industrial Average made a new post October 2022 high unaccompanied by the Nasdaq Composite and the SPX.  This is a bearish “Rule of the Majority” signal.

Daily momentum and sentiment evidence strongly implies U.S. stocks could trend lower.