Mercy Bounce from Big Support


S&P 500, Nasdaq 100, Dow Jones Talking Points:

  • It’s been a rough first half of Q2 for equities and the pain trade doesn’t look over yet. The most bullish factor stocks have going at the moment is just how bearish everything has been.
  • The Fed has been clear that their primary goal is tackling inflation and that remains high. We’ll get the next installment in that data point tomorrow with the release of CPI for the month of April, expected at 8.1% versus the 8.5% from March.
  • Stocks are bouncing today after all of the Dow, S&P and Nasdaq tested through major supports yesterday. This seems like a bear market bounce that puts the focus back on resistance in the effort of finding lower-highs for bearish continuation scenarios.
  • 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.

It’s been a cruel start to Q2 for stocks but, really that theme was starting to show more prominently at the start of the year. The big change of late seems to be market acceptance that the Fed will, in fact, give preference to their battle with inflation over stock market gains. It might not have seemed that way, particularly after last week’s FOMC rate decision.

The Fed hiked by 50 basis points for the first time in 22 years but stocks flew higher later in that session as Jerome Powell seemingly closed the door on the prospect of a 75 basis point hike in June. But, that doesn’t mean that the Fed isn’t going to continue to try to tamp down inflation, and the slower approach may actually bring more bearish behavior as capitulation seems even further away. More hikes up front may spell for a messier market in the short-term. But, it could also give the bank a better chance at actually reducing inflation so that they can move away from this tightening stance sooner rather than later.

That obviously didn’t happen and when the Fed erred on the side of caution last week, a massive short-covering rally developed on Fed day that was entirely faded the following day.

Since then – we’ve pretty much had mostly weakness. The Friday session was painful for stocks as was yesterday; but as we open Tuesday a bit of hope has shown up as stocks have put in an overnight bounce from fresh yearly lows.

The big question – can it hold or is this just another bear market bounce that sellers will use to set up short positions at more favorable points on the chart.

S&P 500

Yesterday the S&P 500 crossed the 4k psychological level for the first time since March of 2021. That level provided some support in the middle of yesterday’s US session but even that came under fire from sellers ahead of the close. The level then showed as resistance in early-Asia trade before support finally set-in around 3961.

At this point, it seems we have a bear market rally on our hands after stocks have went back into an oversold state yesterday, and this would be somewhat similar to the positioning that we saw ahead of that FOMC rate decision, when the market was so heavily short that even a hint of positive news sent sellers heading for the exits. That creates a quick move higher which then squeezes other shorts and, eventually, we have a short-term rally on our hands.

From short-term charts, we can see that continuation of higher-highs and higher-lows in the S&P 500. The big question here is where bears step back in. Last week – resistance played-in at the same 4304 resistance that was in-play ahead of the rate decision. And there’s a plethora of prior swing-lows to use for possible lower-high resistance, with a nearby level at 4065 followed by another at 4100. After that, 4147 comes into play and that’s followed by another big zone, spanning from 4186-4211.

S&P 500 30-Minute Chart

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

Nasdaq 100

I’ve been even more bearish on the Nasdaq than the S&P 500 and that remains the case today. The tech heavy index remains vulnerable in a rising rate environment. We’re in the early stages of the tightening cycle and already the index is in ‘bear market territory,’ dropping by more than 20% from the prior high in November.

And there’s been a steep fall of late, as well, taken from the five prior weeks of losses after the Nasdaq hit resistance at 15,300 again in late-March. That second hit made for a double top formation – which keeps the door open for further losses.

Yesterday saw the Nasdaq test through another key spot of support taken from the 12,207-12,465 area. The overnight bounce here has brought price up to resistance at prior support, plotted from 12,519.

At this point, the big question is how aggressive sellers remain to be. Prices have similarly put in a quick move that can be argued is already oversold, meaning that the counter trend move may have a bit more room to run. But, this would need to be coupled with reality – with buyers holding short-term support above either 12,409 or 12,294; preferably the former versus the latter. That can keep the door open for a move up to resistance at 12,629 or 12,710. If neither of those spots can hold the highs, then the prior support zone comes into view at 12,895-13,050. That was a really important zone last week so a return for resistance cannot be ruled out and this could still allow for the longer-term bearish bias to remain.

Nasdaq 100 30 Minute Price Chart

Nasdaq 100 30m chart

Chart prepared by James Stanley; Nasdaq 100 on Tradingview

Dow Jones Broadening Pattern, Bounce from 32k

For bearish US equity approaches, I’m still of the opinion that the S&P 500 and Nasdaq 100 have more attractive near-term potential. The Dow, however, has similarly bearish leanings and that may equate to a big move at some point, as indicated by the broadening pattern that continues to show on the weekly chart.

Dow Jones Weekly Price Chart

dow jones weekly price chart

Chart prepared by James Stanley; Dow Jones on Tradingview

On a shorter-term basis, the daily chart remains of interest and it’s already been a fast start to the day for the index – which could equate to a bullish engulf by the time all is said and done. If that happens, the pullback from support could run for a bit longer. But, more important than today’s move is how the Dow responds to resistance levels: There’s a nearby spot at 32,746 and above that, another at 33,031. If the pullback can run for a while the next major spot of resistance is up at the 34,025 level.

Dow Jones Daily Price Chart

Dow Jones daily price chart

Chart prepared by James Stanley; Dow Jones on Tradingview

— Written by James Stanley, Senior Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX





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