Indices Technical Forecast: Bearish

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Last quarter finished in a very bearish manner in stocks. The S&P 500, Nasdaq and Dow all closed at a fresh yearly lows and over the weekend, there was a flurry of bearish activity on social media. First it was Friday night, with a rumor circulating about a closed-door meeting at the FOMC on Monday that many were construing to be some emergency meeting about policy. This was widely-misconstrued, as that closed-door meeting at the Fed is just a regular meeting that happens every month.

And then on Saturday morning, rumors began circulating about the possible demise of Credit Suisse, a bank that hasn’t exactly been in a healthy spot of late which made the rumor a bit more believable. But, this too failed to pummel markets as Monday opened with a strong breakout from a falling wedge formation in the S&P 500, and the combined performance on the index on Monday and Tuesday was the largest two-day-gain since April of 2020 when the Fed was warming up the pump.

S&P 500 Four-Hour Chart: Falling Wedge

SPX four hour chart

Chart prepared by James Stanley; S&P 500 on Tradingview

Resistance eventually caught in the S&P 500 at a familiar spot of 3802. I talked about this level on Twitter a lot as it was confluent between two Fibonacci retracements with the 38.2% of the pandemic move and 38.2% of the recent sell-off coming within a tick of each other. This zone helped to hold the highs on Wednesday and Thursday, producing an evening star formation on the daily chart, after which a strong bearish move on Friday pushed prices back to support.

For next week, last week’s high remains a key point of emphasis and that can be looked to as invalidation for bearish themes. In that scenario, next resistance levels show around 3873 and 3922. For support – there’s one major level on the way to fresh yearly lows and that’s last week’s low of 3571. After that, doors open to moves down towards 3500, 3400, 3300 and 3200, with some reference around each of those psychological levels.

S&P 500 Daily Chart

SPX daily chart

Chart prepared by James Stanley; S&P 500 on Tradingview

S&P 500 Bigger Picture

The backdrop remains bearish in my view and this is brought upon by a combination of the persistent-hawkishness at the Federal Reserve and the lagging impact in equities as both bonds and FX are and have been screaming risk aversion.

And after 13 years of conditioning market participants have become accustomed to a loose and accommodative Fed, backing off of tighter policy at the slightest hint of stress. So, as the pattern goes, market participants continue to look for slivers of hope in the data in effort of getting in-front of a Fed pivot.

This explains the rally that started in June and ran for two months, and that move seemed to generate from Jerome Powell’s quote at that rate hike when he said that the FOMC was now at the neutral rate.

The only problem is that inflation continued to run-higher and even today, there’s no sign yet that we’ve hit a peak. And even if we have hit peak, inflation remains prohibitively-high and the Fed is going to continue to address it which explains the persistence with which we’ve heard the bank reminding markets of such over the past week. They’ve been very clear about this and yet market participants, at least some of them, are harboring the anticipation that there may soon be some form of a pivot.

Sentiment

I wrote about this on Wednesday as sellers were starting to show run from that 3802 level but, sentiment matters.

Even in the most bearish of environments – with all factors pointing lower – if any and everyone that does want to sell already has – then how will prices move lower?

They won’t… because supply/demand dictates that lower prices will need additional supply and if there is none, well, then prices won’t fall. And then when prices don’t fall on bad data or when every sign in the world is saying they should – some sellers begin to get anxious as their trades aren’t working, and so they bail. That means buying to cover short positions which increases demand and in-turn, price. And then as price works higher after bouncing from support, there’s reversal potential and given proximity to that support, there could even be attractive risk-reward ratios for counter-trend setups.

This is why sentiment is so incredibly important and this current bear market theme is somewhat unique.

Traditionally in a bear market you also have falling rates, so higher bond prices. And investors have an opportunity cost of staying in stocks that are selling off because bonds are going up and they can lock in rates that are higher than what’s expected in the future. This is why yield curves invert – the longer the duration, the larger the potential move (convexity), so investors hit the long-end of the curve to lock up those rates before they fall further and as rates do fall further, the principal value of those bonds increases.

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But that’s not happening right now because rates are going up and bond prices are falling – and there is nowhere to hide. So longer-term bulls appear to have not yet capitulated. When they do, that’s when the larger sell-offs may show, accented with strong breaches of support that do lead into continued breakdowns in price action. And in my mind this is something that probably won’t show until something else breaks, the probability of which increases as the Fed continues to turn the pressure up.

Until then – when we do get those items of support, such as what showed on Monday morning, and there’s a dearth of bearish activity at those lows, counter-trend short-term scenarios remain an option.

But, given the larger trend combined with what’s continuing to push it, also including the important fact that the Fed does not look to be near a pivot, the forecast for this week will remain as bearish. The long side of stocks still feels as if it’s fighting the Fed because the Fed is straight-up warning markets that they’re going to hike until either inflation is subdued or until something breaks, neither of which are bullish factors for stocks.

The bearish side of stocks is my Top Trade for Q4 and this is now the third quarter in a row, and that’s after bullish USD for Q1 which still seems a related theme.

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S&P 500 Weekly Price Chart

SPX weekly chart

Chart prepared by James Stanley; S&P 500 on Tradingview

Nasdaq

The Nasdaq 100 put in an impressive gain of 7.7% from the Sunday night lows up to the Wednesday night highs, running into a key area of confluent resistance plotted around 11,698 before reversing the bulk of that prior move. This leaves an extended upper wick on the weekly chart highlighting that reversal and sellers negated a bullish engulfing formation that was showing into the Friday morning NFP report.

Going into next week support looks vulnerable although the big question remains around capitulation from longer-term bulls. The recent swing-low is just slightly-lower than the June swing low, indicating a slowdown in bearish price action even while at a fresh yearly low. So for the bearish theme to remain attractive we’re going to need a violation of support and rather soon, otherwise squeeze scenarios could come back into the picture as heavy short-term sentiment could become a hindrance to further bearish price action.

The below weekly chart highlights this well and I think it also echoes the theme of this forecast, looking for bearish continuation on a bigger picture although remaining cautious of squeezes in the near-term, waiting for that big picture capitulation from longer-term investors.

Bigger picture, support zones from 9763-10,000 remain of note, with the latter level a major psychological level and the former the pre-pandemic swing-high, and if the sell-off continues to scale in Q4, there’s even potential for a move down towards the 8404-9798 support zone between two longer-term Fibonacci levels.

Nasdaq Weekly Chart

Nasdaq weekly chart

Chart prepared by James Stanley; Nasdaq 100 on Tradingview

Dow Jones

The 30k psychological level remains a big point of emphasis for the Dow and this week saw rejection above that price. A Tuesday breakout ran into a prior swing-low at 30,406, which led to a doji on Wednesday and a pullback on Thursday, completing an evening star formation. Friday price action continued that move to push back-below the 30k handle.

The primary challenge with the Dow for next week is one of proximity. This week’s move pushed far away from resistance and support at fresh yearly lows is now very nearby, which complicates trade scenarios given risk-reward potential. What could be interesting, however, is pullbacks into the longer-term support zone that’s now resistance potential and this runs from 29,671 up to the 30k psychological level. That would set up the potential for lower-high resistance which could then open the door for bearish continuation scenarios.

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Dow Jones Daily Price Chart

Dow Jones daily chart

Chart prepared by James Stanley; Dow Jones on Tradingview

— Written by James Stanley, Senior Strategist, DailyFX.com & Head of DailyFX Education

Contact and follow James on Twitter: @JStanleyFX





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