Indices Technical Forecast: Bearish
- S&P 500 broke-down ahead of the Friday CPI release.
- Nasdaq 100 begins re-test of key support that held the lows in May.
- Dow Jones looks poised to re-test the yearly low that was set in May at 30,585.
- 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.
What’s in the box?
Well, not stock prices, not anymore. U.S. equities displayed a surprising sense of calm for almost nine full trading days, allowing for a rectangle formation to build in both the S&P 500 and the Nasdaq 100.
Rectangles are basically ranges but shown on a longer-term horizon. If a short-term range develops and price bounces back-and-forth, and you scroll back to a longer time frame you’ll notice the box. And just like short-term traders will often look for the breach of a range to trade a fresh breakout, which could then become a new trend, longer-term traders look for a breach of the box support or resistance to open up a directional setup.
Those boxes broke with about an hour to go in Thursday’s session and the S&P 500 jumped all the way down towards the 4,000 psychological level. This was, of course, in anticipation of the Friday CPI report. And that Friday CPI report was interesting as the headline portion of the report printed at a fresh 40-year-high.
This sets up for a difficult backdrop for the Fed next week and, bigger picture, for equity bulls. I’ve followed this theme closely since late last year as the Fed was starting to open the door for higher rate policy. And for Q2, I set the bearish side of stocks as my Top Trade and that’s a theme that I’m still following for lower-lows.
For next week the forecast will be set to bearish as it appears that bears are back in the indices and the Fed has little choice but to hike rates while warning of numerous additional hikes in the effort of making a dent on inflation.
I’m going to start this with a clean weekly chart, highlighting a Fibonacci retracement that’s done a really good job of guiding the move this year. This retracement is a simple one that can be drawn from the pandemic lows in March of 2020 up to the January high. The 23.6% retracement of that move started to come into play in February and March of this year to help set support.
But by late-April bears had already taken it out, and that move ran all the way down to the 38.2% retracement, after which a bit of support began to develop again. As prices bounced, resistance played in off of that same 23.6% retracement that had set prior support. This highlights vulnerability at that 38.2% retracement for next week, which plots right around the 3800 level.
S&P 500 Weekly Price Chart
Getting a bit more granular with the matter and the daily chart highlights a zone of support running from that Fibonacci level above at 3802 up to 3830. A break below this zone exposes the next spot of support, plotted at around 3664. Notably, the red zone on the below chart is when the index goes back into ‘bear market territory.’
S&P 500 Daily Chart
Chart prepared by James Stanley; S&P 500 on Tradingview
I’m still following the Nasdaq 100 as a more bearish scenario than the S&P 500 looked at above. And I’ve made this comparison a few times over the past couple of days but it’s worth noting here. While the S&P 500 found support at the 38.2% retracement of the pandemic move, with resistance playing in off of prior support at the 23.6% marker – the Nasdaq was a step-lower on a very similar theme.
The pandemic move in the Nasdaq is plotted on the weekly chart below, and support here played-in off of the 50% marker with resistance then showing up at the 38.2% mark, which was prior support in March.
This keeps the door open for a steeper dive in the index.
Nasdaq 100 Weekly Chart
On a shorter-term basis the bearish move appears more developed in the Nasdaq. While the S&P 500 has some distance to go before engaging with the top of its support zone at 3830, the Nasdaq 100 has already started to test that zone, which I’m marking at around 11,964. Prices penetrated that low during the Friday session and pulled up just shy of another Fibonacci level at 11,837. This similarly keeps the door open for breakout potential into next week as the Fed faces a stiff test at the Wednesday meeting.
Nasdaq 100 Daily Chart
Chart prepared by James Stanley; Nasdaq 100 on Tradingview
By comparison, the Dow has held up fairly well, all factors considered. Sticking with our apples-to-apples comparison of the major indices, I’ve added a Fibonacci retracement to the pandemic move spanning from the March 2020 low up to the recent high.
While the S&P 500 has found support at its 38.2% retracement and the Nasdaq 100 at the 50%, the Dow Jones still has yet to test the 38.2% marker. This would show a greater degree of resiliency as the rate hike theme has taken center-stage so far this year and while the formation is far from bullish, it’s certainly not as bearish as either of the above two setups in the S&P 500 or the Nasdaq 100.
Dow Jones Weekly Price Chart
Dow Jones Shorter-Term
Could this lessened degree of pressure keep the door open for bullish approaches on the Dow? I’m not quite there yet and the daily chart holds a similar bearish allure, albeit less than what was looked at above. There is, however, some reference for support and resistance levels.
The Friday plunge saw the Dow peel down to the 50% marker of the November 2020 – January 2022 major move. That level plots at 31,393 and, so far, that’s contained the lows. There’s a confluent level just above current price action plotted from 32,408 up to 32,676, and this is a zone that can be used for near-term resistance potential if a bounce does develop ahead of the FOMC.
For underside – the swing level at 30,512 remains key as buyers had come in ahead of a test there last month; and below that brings a 61.8% retracement at 30,109 which is followed by the 30k psychological level and another Fibonacci level at 29,671. A breach of support at 30,512 opens the door for a run down to the bigger picture support zone in the Dow Jones.
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