S&P 500, Nasdaq 100, Dow Jones Technical Forecast: Bearish
- Stocks started and finished the week with selling but there was some bounce in-between.
- Next week brings the FOMC rate decision and the Fed is widely-expected to begin liftoff there. The 25 bp hike for next Wednesday appears priced-in at this point, but it’s the other items that can keep equity markets on the move, namely the Russia-Ukraine scenario and the inflationary impact that it will add to last week’s 7.9% CPI print.
- Also of concern is yield curve compression with the 2/10 US Treasury spread making a fast move towards inversion. This is a common signal of potential recessions and given the fact that the Fed looks to be forced into more and more rate hikes given inflation, this could be a turbulent environment for equities.
- 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 become a pattern of recent with headlines worsening over the weekend, as markets were closed, only for gaps to show when futures open for trading on Sunday night. Last week was no different and that weakness in U.S. equities held through the first couple days of the week, with a really strong bounce developing on Wednesday that was partially faded-out on Thursday and Friday.
Next week brings the Fed and the widely-expected lift-off for rates. While the possibility of a 50 basis point hike was roiling the market just a month ago, those expectations have diminished with markets now looking for a 25 basis point move. At this point that quarter-point hike feels well priced-in; but it’s the other items that remain of interest.
Last week saw inflation come out at 7.9% and 6.4% for core, which strips out food and energy. And while many are blaming inflation on the Russian invasion of Ukraine, the data suggests otherwise as inflation was climbing well before any Russian tanks were lining the border.
And while war can be construed as a positive for market performance, at least historically speaking, the reason for that is often the attached stimulus that’ll be injected into the system. But, that’s already been happening over the past two years. And now, there’s a number of additional risks presented by the current scenario, namely the massive price spikes that’ve shown in commodities like wheat, oil, gold, silver and nickel. These spikes in raw materials will probably show in inflation data in the coming months, likely within the next 3-6 months, and considering how strong inflation was before all of this started to happen, the Fed could be even further backed into a corner than originally feared, and this could be a drag for equity performance.
Speaking to that fear, the recent commotion across markets has created a swell in US Treasuries and this has pushed the spread between 2 and 10 year Treasuries issues to its tightest since the pandemic. That portion of the yield curve is close to inversion, which can be considered a recessionary signal, so we may soon have the unenviable situation of the Fed being forced to hike into a recession, with very little latitude given already-high inflation that may be set to get even worse.
US Treasury 2/10 Yield Curve Spread: Fast Move Towards Inversion
All of this spells potential trouble for equity and as such the forecast for all three U.S. indices will be set to bearish for next week. Below, I go over levels for each.
The S&P 500 saw a rush of weakness enter the equation in January and this was mostly driven by the expectations around rate hikes. With inflation remaining brisk and the Fed making a concerted effort to tell market participants that they would be shifting into a more-hawkish gear this year, stocks began to crater and put in an aggressive move of weakness very fast.
A bounce developed in February but by the latter-portion of the month Russia had already begun to move on their Ukrainian invasion plans and this drove another bearish leg for the S&P 500, setting another low just above the 4100 spot on the chart.
At this point, prices are grasping on the cliff edge around 4200 and fresh ten month lows are about 100 handles away. A breach of 4100 opens the door for a move down to the psychological level at 4000, after which a big spot of potential support opens up around the 3800 level, where there’s multiple Fibonacci retracements in relative proximity.
A move down to that zone would be just a little more than 20% away from the January high, which would place the S&P 500 in a technical bear market at that point.
S&P 500 Daily Price Chart
The Nasdaq 100 is already in a bear market, being more than 20% away from the high that was set last November. But, similar to the S&P 500 the Nasdaq 100 has a shelf of support that’s been in-play for a couple of weeks now just above the 13k handle. There’s a couple of Fibonacci levels to make for a bit of confluence in this zone and the next significant spot of support below that is around 12,250, which is approximately 7.8% away from the weekly close.
Below that, the 50% marker from the pandemic move plots at around 11,700, and this could function as a longer-term target for bigger-picture bearish themes. For next week, the big question is whether sellers can pose a breakout beyond that confluent spot of support around the 13k handle.
Nasdaq 100 Weekly Price Chart
The Dow has continued to hold support around the 32,500 spot on the chart. As looked at on Monday there’s a bit of confluence at that spot, with both the 23.6% retracement of the pandemic move and the 14.4% retracement of the post-Financial Collapse move setting up in very close proximity.
To date, there hasn’t been a daily close below this zone since last March, and a push below could open the proverbial floodgates as sellers take their swing. The next major spot of support on the chart is around the 30k handle, which is a psychological level while also very near two different Fibonacci retracements, including the 38.2% marker of the pandemic move.
That 30k level is around 8.76% below the weekly close, which could be an enticing bearish setup to follow, even if the S&P 500 and Nasdaq have shown greater bearish price action over the past couple of months. If support at 32,500 doesn’t give way next week, there’s resistance potential around 34,133, or the 14.4% retracement of the pandemic move.
Dow Jones Weekly Price Chart
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX