Equity markets pulled back last week, casting a dark shadow on the near-term outlook. The S&P 500 fell more than 2.25% to create a Bearish Engulfing Pattern that confirms resistance at a lower level than before. This shows bears advancing on the back of increasing risk and the odds of another FOMC interest rate hike. War in the Middle East threatens to spur inflation as the government ramps up aid and military spending.

This is going to be another trying week for equity markets. The PCE Price Index is due on Friday and will likely show persistently high inflation. The risk is that high oil prices will show in the data, and inflation will accelerate. In this scenario, the FOMC will have no choice but to hike rates again, and it could come as soon as the end of the year. A hot read on the PCE could send the S&P below critical support and open the door to another 5% decline.