Oct 17, 2022
VOT Research Desk
As earnings season begins, US stocks are still in a precarious position.
While the market movement has been largely bearish so far this year, there has been a significant slowdown in bearish activity at support or following the formation of new lows.
Retail traders face a difficult environment as a result of the potential stifling of breakout methods and the increasing appeal of counter-trend strategies.
Corporate earnings are beginning to be impacted by higher rates, and this quarter’s main question mark is guidance and how businesses foresee an impact on.
Last week, the S&P 500 made a new, albeit brief, annual low. It was a quick move ahead of Thursday’s opening of the US market, shortly after the CPI report showed that Core CPI had reached a new high. Sellers had about an hour to run before the NYSE opened for the day. Additionally, equity markets began to pivot as soon as 9:30 a.m., and the Nasdaq was already more than 7% higher than its early-morning low within a few hours. The S&P 500 bounced from its trough to its peak at a more manageable 6.62 percent, demonstrating just how enthusiastic that Thursday session was.
However, sellers returned on Friday and erased a significant portion of that move. An interesting observation emerges from this: Recently, Fridays have been particularly difficult for the equity trade. And given that investors are looking to close positions in advance of a weekend when they are 48 hours vulnerable to news headlines, that makes sense when we consider the percolating risk that has been exhibited in bonds and foreign exchange but not in the stock market to the same degree (panic).
We have circled the last nine Fridays on the chart below, and with the exception of Friday, September 9th, the overall mood has been bearish.
The equity markets are in a precarious position. Even though short-term sentiment becomes extremely bearish, as evidenced by a significant amount of put buying, We also do not believe that long-term investors have given up much. That’s because there aren’t enough opportunity costs. When a market falls, as it has this year, yields typically fall as markets anticipate a softer stance from the Central Bank.
Bonds, on the other hand, aren’t particularly appealing when the Central Bank is telling you that they will a) continue to raise rates and b) continue to sell bonds via QT, which becomes yet another factor that pushes yields higher (more supply) and is what’s causing the sell-off. As a result, the safer harbor of bonds no longer appears to be all that secure.
This also indicates that the trend will likely not be a one-sided move, despite the fact that the background appears decisively bearish, as we have seen since June and were reminded of once more last week. Additionally, bear markets are when some of the strongest rips occur, such as on Thursday.
Waiting for resistance can help bears who want to be bearish avoid being caught selling lows, which has been a difficult prospect recently in the S&P 500.
Additionally, a possible falling wedge is currently forming on the chart. However, the 3660 Fibonacci level, which is a price level that is back in play ahead of this week’s open, is particularly notable because it has been a restraint to bearish trends in recent times.
As the swing high the previous week was already a resistance-turned-support level, 3735 looms large above the 3660 level. Above that, a bullish break of the falling wedge opens the door to a larger pullback potential for the pair, with 3802-3822 serving as overhead major resistance.
We tracking key support at 3571-3584, which has only been traded through for a short time, on the support side of the issue. Our initial support target for the S&P 500’s Q4 Top Trade was 3500 if sellers are successful in breaking that.
In the Top Trade installment, our initial support target for the S&P 500 was only a few ticks away, but the Nasdaq100 did reach that level last week.
The 61.8% Fibonacci retracement of the pandemic move occurred at that price, 10,501.On Thursday morning, shortly after CPI, that level came into play, triggering a massive rise that reached 7.33 percent. With the assistance of a bearish trend line, Price encountered resistance in a familiar region ranging from 11,091 to 11,294, but on Friday, it lost a significant amount of those gains.
We are tracking spots at 11,091 and the zone between 11,229 and 11,294 for resistance.
If the bulls are successful in breaking above that, the bearish trend line will be breached, opening the way for a more substantial pullback. We are monitoring resistance potential at 11,367, 11,550, and then 11,698 for larger pullbacks.
THE DOW WE looked at the Dow shortly after the CPI alert on Thursday, and as we previously mentioned, there was a significant resistance level just above the 38.2% Fibonacci level of the pandemic move, which is plotted at 29,671.
The bar closed right around that level last week, and prices are starting to recover this week. This brings to light a region of short-term resistance last week that extends from 30,422 to 30569.If there is a break above that, a push to support-turned-resistance at 31,167 is possible.
On the positive side, that 29,671 level and 29,815 can be lined up to form a zone. The lows are vulnerable if sellers can break through that, but around 29,175—which we are tracking as a middle ground between the two points of support—has already provided some significant support.
