Indices Technical Forecast: Bearish

  • Stocks continued to rise into Friday trade while furthering the pullback that started from lows in mid-June.
  • Next week brings the FOMC with an expected 75 basis point rate hike, but the bigger item at the moment is negative economic data such as the Friday PMI release and how the Fed will manage the continued fight against inflation as signs begin to stack of possible recessionary pressures.
  • 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 was a strong week for stocks with the major indices continuing to pullback from lows that were set in June, right around the last FOMC rate decision. The Nasdaq bottomed-out the day after the Fed hiked by 75 basis points with the S&P 500 and Dow setting a low the day after. Notably, that’s also around when yields had topped, as the 10-year tagged 3.495% before beginning to turn. Since then, we’ve seen yields falling and stocks rising, reminiscent of prior bull runs that were fueled by easy-money policies from the Federal Reserve and, naturally, there are many that are calling for higher stock prices as the Fed faces a raft of negative economic data highlighting possible recessionary pressures on the horizon.

US 10-Year Yields

S&P 500, Nasdaq 100, Dow Jones Forecast for the Week Ahead

Chart prepared by James Stanley; 10-Year Treasury on Tradingview

Monday’s housing data out of the US was massively disappointing and likely a response to higher rates; Thursday’s jobless claims data came in above expectations, highlighting possible impact to the labor market and the Friday PMI release, which is considered a leading indicator, came in at 47.5. The 50 mark denotes expansion so printing below that level illustrates contraction; and save for a brief period in 2020, PMI is as low as it’s been since the Financial Collapse.

So, surely the Fed is ready to back off of higher rate policy, right? After all, for years and years bad news was ‘good’ and good news was ‘bad,’ and that was largely on the basis of expectation for FOMC policy in response. Which led to the implied third mandate from the Fed of wanting to see stock prices running higher.

Well, taking a step back, inflation remains elevated and the Fed has repeatedly pointed out that this is a primary concern. And with mid-term elections coming up in November and voters frustrated by rising prices, it seems as though it would be a stretch for the Fed to abandon their fight against inflation at this point, just four months after starting to hike rates.

And, even if the Fed did slow down their rate hike plans for fear of recessionary impacts, would that necessarily be a bullish item for stocks? Because it seems incredibly unlikely that the Fed will pivot directly from a hard-hiking and hawkish stance into extreme dovishness with more QE and rate cuts, unless there was a very, very compelling reason to do so – such as a pandemic. We would likely need to see inflation back-below 2% for that to begin taking shape. So, to bring that uber-bullish monetary backdrop into the equation for equities, it would seem that some extreme damage would need to take place first and I have a difficult time assigning a bullish outlook to that logic.

So, at this point I’m considering the month-long pullback as a corrective move in a broader bearish trend. Next week’s FOMC is a big item for that theme as it will highlight whether bears return on the back of the Fed’s messaging, or whether the bank assuages those fears to allow bulls to continue pressing the bid.

Now, with that said – it’s not all doom-and-gloom. I think there’s also a chance that we end up back towards ATHs ahead of the 2024 election, but the first step would be the Fed arresting inflationary impact and restoring calm to consumers, and that appears at least a few steps away from where we’re at right now.

S&P 500

The S&P 500 broke out of a symmetrical triangle formation this week. Given the prior bearish trend, this could’ve even taken on the form of a bear pennant, but that was negated by the bullish breakout as prices ran-higher in the latter portion of last week.

That breakout ran through Wednesday and Thursday trade, with resistance finally showing up around the 4k level which has quite a bit of confluence. The 50% marker from the Fibonacci retracement spanning the September 2020 low to the January 2022 high rests at 4003.25; and, of course, 4,000 is a major psychological level.

S&P 500 Daily Chart

S&P 500, Nasdaq 100, Dow Jones Forecast for the Week Ahead

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

The big test for timing the return of the bearish theme for next week is 3922. This is a resistance-turned-support level that was a key point of reference for last week’s breakout. If prices can slide below that level, the door opens for a re-test of the larger support zone spanning from 3802-3830.

But – and this is a big but, if prices can hold support above that level, there’s room for a run up towards 4100. Again, there’s some confluence there with 4100 as a minor psychological level and a Fibonacci level at 4099. That Fibonacci level is from the same series that helped to catch the low in June, as the 38.2% marker and that 4099 level is the 23.6% mark of the same study. And – if we draw a Fibonacci retracement along the 2022 sell-off, the 38.2% mark of that move also aligns nearby, at 4085. And, that zone was also support in February, just after the knee-jerk move following the Russian invasion of Ukraine.

It’s a big area, and given how strong the counter-trend move has run, I’d have to keep the door open for a further test there.

S&P 500 Weekly Chart

S&P 500, Nasdaq 100, Dow Jones Forecast for the Week Ahead

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

Nasdaq 100

The Nasdaq similarly broke out of a consolidation formation this week, with a symmetrical triangle giving way to bullish pressure. That breakout, however, took on the form of a short-term rising wedge, which started to give way on Friday as prices pulled back. Prices slipped below a big point of reference, running from 12,412-12,480, which was support-turned-resistance.

A pullback there on Friday was unable to hold and prices continued to pull back, opening the door for a move back towards 12,262 or perhaps 12,174. A break of that second level re-opens the door for bears, with next supports at 11,964, 11,837 and then 11,698. If that latter price gets taken-out, we likely are also looking at a bearish breach of the bullish trendline, which could soon re-open the door to big picture breakdown themes.

And, notably, Friday printed as a bearish engulfing candlestick on the daily, thereby keeping the door open for bearish pressure into next week’s open.

Nasdaq 100 Four-Hour Price Chart

S&P 500, Nasdaq 100, Dow Jones Forecast for the Week Ahead

Dow Jones

The interesting item around the Dow right now was the support that held the lows over a five-week-period from mid-June. That support has a few different items there, including the 30k psychological level and a couple of Fibonacci retirements of note. But, more telling was the wick response to the top of that zone last week, at around the 30,109 level. That seemed a pretty clear sign of bulls defending support and that led to a strong pop on Friday of last week that ran into Friday of this week.

I don’t have great resistance structure nearby here, however, so while I remain bearish on US equities, I’m a bit less aggressive with that stance in the Dow. There is a point of resistance spanning from 32,408-32676. That was a spot of prior support in February and, as yet, hasn’t shown much for resistance on longer-term charts.

Dow Jones Weekly Chart

S&P 500, Nasdaq 100, Dow Jones Forecast for the Week Ahead

Chart prepared by James Stanley; Dow Jones on Tradingview

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

Contact and follow James on Twitter: @JStanleyFX

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