S&P 500, Nasdaq 100, Dow Jones Forecasts: Variance in the Bounce

[MongiIG]

S&P 500, NASDAQ 100, DOW JONES TALKING POINTS:

• After starting Q2 with a steady sell-off, US equities have held last week’s support while starting to bounce this week with some help from earnings season.
• There is some variance in the bounces across indices, however, with the Nasdaq continuing to lag while the Dow and the S&P have led the way higher. I looked into this on the Tuesday webinar and that theme has continued to show.
• 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.
  

U.S. equities are trading higher on the morning after another sizable gap from Tesla following a fairly strong earnings report.

In indices, this marks a contrast to last week’s backdrop and what showed around the Q2 open. After a massive post-FOMC rally drove stocks to monthly highs in late-March, sellers started to re-engage as the Q2 open neared and that allowed for a three-week pattern of weakness until a major spot of support started to come into play in all three of the S&P 500, Nasdaq 100 and the Dow.

And to be sure, there are a plethora of risks to equities, including the expectation for a massive shift in Fed policy later this year. Markets are currently expecting another nine rate hikes out of the FOMC and this also carries the potential for additional tightening through QT, which Fed members have been talking up in various media appearances of recent. And the next rate decision on May 3-4 is expected to be the first 50 basis point hike in a series of many that markets are looking for this year because, after all, there’s only going to be eight months left for the bank to invoke the nine 25 basis point hikes that are expected.

But – trends don’t move in a straight line and, at this point, the Fed hasn’t announced anything formally, we’re still waiting for that. And it does appear as though there’s some harboring expectation that the Fed won’t actually make such an aggressively hawkish move as it would be very counter to the stance from the bank in the post Financial Collapse backdrop. The difference this time, of course, is inflation; and this is why we’ve even heard Fed members saying that they’re trying to engineer a soft landing. But, even with that signaling equities are moving higher after a strong quarterly showing for Tesla and this sets up for a pretty exciting backdrop in equities.

S&P 500

The S&P 500 is back to the 4500 zone which has been a big one for the index going back to December.

In late-November we saw a quick wave of fear get priced-in as the Omicron variant became an issue. That provided a quick sucker-punch to stocks that was soon recovered as the S&P hit a fresh high later in December, but the inflection point where that all turned was the 4500 level.

More recently, this zone was back in-play in late-March as resistance, which then turned into support in early-April as prices were turning around.

S&P 500 DAILY PRICE CHART

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

S&P 500 SHORTER-TERM

Bulls are in control at the moment and a breach of resistance at 4500-4515 opens the door for a run to next resistance at 4538-4550. Beyond that, another key zone exists from 4572-4586, after which 4625-4642 comes into play.

For bearish scenarios, at this point, I’d want to see re-engagement with support/prior resistance at 4445, and if sellers can begin to test through that price, the door is open for a run down to 4371-4383. This would signal a return of the bearish trend to me after which I’d begin to look for moves back towards 4327.

S&P 500 FOUR-HOUR PRICE CHART

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

NASDAQ 100

I talked about this in the Tuesday webinar but my choice on the bearish side of equities remains the Nasdaq 100, which has put in a less bullish bounce than what we looked at above on the S&P 500 or what we’ll look at below in the Dow.

But – if this bearish theme is going to continue to come alive, it’ll likely be on the basis of rates and policy tightening – facts that usually don’t help high beta tech stocks. And around that Q2 sell-off, when sellers started to make their return, the Nasdaq 100 dropped by -10% in three weeks while the S&P 500 dropped a more modest -5.95%.

So, logically speaking, if bears make a bigger splash the Nasdaq holds a bit more allure.

And on the other side of the matter, as this recent recovery has taken root the Nasdaq has lagged both of the other indices, further highlighting this potential for if/when the bearish theme re-emerges.

Regarding near-term dynamics, however, the level of 14,284 has now held four different resistance tests in the index. And more recently, bulls have hurried the move, giving the appearance of topside breakout potential. But just above this resistance is another major zone that looms large from 14,375-14,500.

This can open the door for some scenarios of interest, particularly if we get a resistance break today followed by a visit into that bigger-picture zone, which could open the door for bearish reversal strategies, positing the potential for exhaustion from bulls after finally breaking through this contentious spot of resistance.

NASDAQ 100 HOURLY PRICE CHART

Chart prepared by James Stanley; Nasdaq 100 on Tradingview

DOW JONES

I had made the remark in the Tuesday webinar that the Dow looked like the cleanest backdrop for bulls amongst US equity indices and a couple of days later the index is trading at fresh two-month highs.

The backdrop here was fairly clean at the time: Prices had pulled back in a somewhat orderly fashion for that Q2 sell-off as the index only dropped by 3.63% from the prior high (v/s the 5.95% and 10% drawdowns in the S&P and Nasdaq 100, respectively).

And that sell-off took on the form of a bull flag with a falling wedge, both of which are approached with the aim of topside potential. That formation has since broken out as prices have posted that recent jump.

At this stage, the next spot of resistance remains at a prior double-bottom low from January, plotted at 35,521, and short-term support potential exists at the prior swing-high of 35,281.

DOW JONES FOUR-HOUR PRICE CHART

Chart prepared by James Stanley; Dow Jones on Tradingview

--- Written by James Stanley, Senior Strategist for DailyFX.com. 21st April 2022