Indices Talking Points:
- The S&P 500 is approximately 14.62% above the June low, with the Nasdaq 100 putting in a move of as much as +20.92% and the Dow 11.13% over the same period of time.
- There’s been a tug-of-war so far in 2022, with bears driving on rate hike and inflation concerns and bulls responding to the massive sell-off in the first-half of the year. The bigger question is which theme takes over next and a big decision point in that discussion is on the economic calendar for Wednesday, with the release of CPI data for the month of July.
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
- Quarterly forecasts have just been released from DailyFX and I wrote the technical portion of the US Dollar forecast. To get the full write-up, click on the link below.
It’s been a brisk run over the past seven weeks in US equities. Stocks bottomed in the middle of June, with the Nasdaq setting a fresh two-year-low the day after the FOMC rate decision last month and the S&P 500 setting it’s low a day later.
Since then, bulls have been large and in-charge. What initially looked like a short-covering rally has extended and is now going into its eighth week, with the S&P 500 having jumped by as much as 14.62% and the Nasdaq 100 having gained 20.92% over the same period of time. So, technically, that makes for a bull market in the Nasdaq at 20%.
At source of the discussion is Fed policy and how close the bank might be to some type of a pivot. As US economic data started to turn in Q2, the building hope was that the Fed might pause their rate hike strategy in order to give the rate hikes they’ve already done more time to transmit into the economy. There were a few comments from Chair Powell at the last FOMC press conference that gave bulls hope, and gauging market response, with equities ripping after that last rate hike, it would seem that there’s some evidence to support that thesis.
Last week brought a bit of change into the mix, however. A stream of Fed-speakers reminded markets that they’re not done with policy tightening yet. Inflation remains brisk and the Fed is ‘nowhere near done’ with addressing inflation, despite being at the ‘neutral rate’ as Chair Powell had opined only a week earlier.
This week sees inflation come back into the spotlight with the Wednesday release of CPI data for the month of July. And there is some expected softening in the headline number – which printed at 9.1% last month but is expected to come in at 8.7% for July. Core inflation, however, is expected to pick up to 6.1% from last month’s 5.9% read.
The S&P 500 broke out of a falling wedge formation a few weeks ago and has continued to rally since then. Last week saw a resistance zone come into play that runs from a Fibonacci level at 4085 up to a prior price action spot of support at 4138. Price posed a breakout on Wednesday and has continued to grind since then.
The S&P 500 is in a massive zone of resistance as taken from prior support and there’s a plethora of levels to pull from given how much grind had shown in this region in February/March when it functioned as support and again in May/June as it functioned as support-turned-resistance.
Overhead is another key spot, spanning from 4223 up to 4258. Notably, last week’s weekly bar in the S&P 500 closed as a doji, a sign of indecision. And given the headlines, with Fed-speakers growing more vociferous in their rate hike plans, it would seem the fundamental backdrop matched that technical indication. This week, so far, has seen bulls push on and the index is already testing last week’s high.
S&P 500 Daily Price Chart
With price currently re-testing that spot of resistance from last week’s high following a dip into a support zone, there’s bullish breakout potential here. The next spot of resistance that I’m tracking is at a prior price action swing low of 4195. Beyond that, a Fibonacci level comes into play at 4223 and that’s followed by another price action swing at 4258.
If bulls can continue the pace, 4303 is a massive spot of interest as a prior double-top/triple-top formation.
As for support – the big number is 4085, the 38.2% retracement of this year’s sell-off. That price caught support last week and if bears can pose a push, bearish themes can begin to get a bit more interesting.
S&P 500 Four-Hour Price Chart
Chart prepared by James Stanley; S&P 500 on Tradingview
Nasdaq 100 Trendline Test
The Nasdaq has gained as much as 20.92% from the June low, a whopping figure by any stretch. But now that trend is facing a test at a key trendline that can be found by connecting November and April swing-highs.
That trendline projection came into play on Friday and helped to hold the high. It was under fire in the early-portion of this week, but an NVDA earnings report pre-market helped to pull prices back a bit.
Friday’s bar closed as a bearish engulf, although there was a late session rally that softened the bottom of that candle and printed with some extended wick, which isn’t ideal for a bearish engulf. But, the item of interest for this week is whether or not that high is defended ahead of the Wednesday CPI print.
There’s a massive support zone just below, spanning from 12,894 up to 13,050. For sellers looking at a return of the bearish trend, a push below 12,814 would be of interest.
For next resistance, there’s a prior triple top formation that topped-out at 13,535.
Nasdaq 100 Daily Chart
Short-term, the Dow looks more bullish to me than either of the above indices. While both the S&P and Nasdaq are working around resistance levels, Dow futures are breaking-out after the US equity open. And last week saw defense at a key spot of confluent Fibonacci support, plotted around the 32,400 area on the chart. That’s where the 38.2% Fibonacci retracement of the 2022 sell-off sits, and the 50% marker of that same move plots at 33,236, which I’m tracking for the next spot of resistance in the Dow Jones.
Dow Eight-Hour Chart
--- Written by James Stanley, Senior Strategist, DailyFX.com & Head of DailyFX Education
Contact and follow James on Twitter: @JStanleyFX