U.S. stocks retreated at the start of the week, dragged down by pandemic worries and uncertainty about the direction of monetary policy in the face of stubbornly elevated price pressures ahead of a key Fed meeting.

At the end of the trading session, the S&P 500 fell 0.91% to 4,669, slipping from its record close of 4,712 established on Friday. Elsewhere, the Dow Jones plunged 0.89 % to 35,652 as Home Depot, Goldman Sachs and Boeing posted heavy losses. Meanwhile, the Nasdaq 100 led the broader market lower, sinking 1.53% to 16,082, its lowest level since early December.

Heightened COVID-19 fears after the U.K. confirmed the first known death of a patient with the omicron variant sapped sentiment and prompted traders to trim risk exposure in case the health crisis deteriorates. Many countries in Europe have tightened restrictions in recent days to combat the infection surge and flatten the transmission curve, contingencies that could undermine the global economic recovery. Although we do not yet know much about the new strain of the virus, preliminary data suggest that it may be much more contagious than other coronavirus versions and less sensitive to existing vaccines.

Against this backdrop, travel, and leisure plays such as airlines, cruise operators and hotels were some of the biggest decliners on Monday, with American Airlines (AAL), Carnival Corporation (CCL), and Marriott International (MAR) down approximately5% each. After recent weakness, some reopening stocks possess very attractive valuations and may have strong upside potential over the medium-term, but the never-ending pandemic twists and turns will make timing the rebound a difficult endeavor.

Coronavirus anxiety aside, concerns about monetary policy also seemed to weigh on Wall Street's mood ahead of Wednesday's FOMC decision. Although no change in the federal funds rate is expected after the rate-setting committee concludes its final conclave of the year, policymakers are likely to adopt a hawkish stance and accelerate the bond-buying tapering process to counter red-hot inflation, which hit a four-decade high of 6.8% year-over-year in November.

A faster wind-down of asset purchases may bring the lift-off timetable forward to the first quarter of 2022, an outcome that can unnerve investors and push short-term yields higher, sparking volatility and risk-aversion. Lastly, there is another reason why this week’s FOMC meeting will take on added importance: the bank will release its updated macro forecasts. The Summary of Economic Projections (SEP) will provide valuable information on the outlook and path of monetary policy normalization, two key variables that may have a strong impact on the stock market.

S&P 500 TECHNICAL ANALYSIS

Although the S&P 500 managed to close above the 4,700 psychological level last Friday, buying interest was not sustained, giving way to a small pullback at the start of the new week, a sign that the bulls may be bailing ahead of the US central banks' rate decision. That said, if the index continues to fall in the coming sessions, support is seen at 4,630, although a drop below this floor may accelerate the downward pressure and create the right conditions for a move towards 4,550.

Alternatively, if buyers reassert themselves and push the price higher before year’s end, the first resistance to consider appears near the 4,700/4,715 area, followed by 4,744, the record high. If both of these hurdles are cleared, the S&P 500 could be on its way to test the 4,800 area, a technical barrier created by the upper boundary of a medium-term rising channel in play since March.

S&P 500 TECHNICAL ANALYSIS

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S&P 500 (SPX) Chart by TradingView