In the past weeks, I have been correct on my calls for a lower stock market. Through Market Moment, I have warned traders and investors about the fundamentals (how central banks will remain hawkish and continue to raise interest rates). However, the technicals are what really provided us with the true signs. Especially the charts of the US dollar and the US 10 year yield.
Before we jump into stock market charts, let’s take a quick look at the dollar and yields:
The Dollar is strong, and I still have resistance above at the 117-118 zone. Still have some more room to the upside. But nothing ever just goes up in a straight line. Markets move in waves. You see a move higher, and then a pullback which is followed by another pop higher which takes out the previous recent highs. In technical terms, we call this a higher low.
Higher lows are what constitutes an uptrend. The US dollar is clearly in an uptrend, and has broken above a major resistance (price ceiling) zone at 110. As long as price remains above 110, the uptrend in the dollar remains, and we should expect to see further dollar strength.
Personally, I am buying the pullbacks in the dollar. You can either do this, or wait for the dollar to pullback and then breakout above the recent highs at 114.50. The second option is the safer play which will increase your probability for success but you miss out on some gains. The first option is for someone who has a strong case for a stronger US dollar. Seeing world currencies get smashed from the Yen to the Euro and now the Pound, I do believe the dollar milkshake is playing out.
Money is running into the safety of the US dollar. The stronger the dollar gets, the more havoc it will wreck, hence the dollar being called the “wrecking ball”. For more info on fundamentals, check out my latest piece covering the dollar.
The US 10 year yield remains the first chart I look at when I get up during a trading day. The bond markets are very important. As yields go higher, it will put pressure on stock markets… and the indebted middle class. Yields have also broken above major resistance zones and are in a strong uptrend. Same approach as the dollar applies here, pullbacks are buying opportunities.
3.50% is the support zone I am watching. The higher yields go, the more pressure we see on stock markets. In basic terms, when the 10 year moves higher, watch for markets to fall. When the 10 year drops or remains stable (range) watch for markets to go green.
Now let’s look at those stock market charts.
I want to start with the longer term weekly charts so you all see where we are in the trend:
Above are the weekly charts of the S&P 500 and the Nasdaq. Both markets are testing the yearly lows we printed back in June 2022. Previous lows tend to act as support (price floors). If there is to be a bounce, there is a high probability it would occur at these price levels.
This wider look at the technicals is really important because you will see that we have been in a downtrend ever since we broke below support back in January 2022. Remember the concept of higher lows where price pulls back before breaking above recent highs? Well, the same applies to a downtrend, but we call this structure a lower high.
The weekly charts have a slower signal because of the longer timeframe, however, they tend to give us the strongest signals. The higher the timeframe, the stronger the signal.
I avoided the Dow Jones because the weekly chart (and the daily as you will see) looks different. First off, we have to acknowledge that the Dow is at a MAJOR support zone. If you look to the left, you will see this area acted as resistance back in 2020. What was once resistance now becomes support. I call these areas which have acted both as support and resistance ‘flip zones’. This is a major flip zone which should see buyers. However, the Dow had a weekly candle close last week which took us below 30,000 and below the previous weekly body candles printed in June of this year.
In other words, the Dow Jones has printed new lows for 2022 unlike the S&P 500 and the Nasdaq.
The daily charts are where many of us will likely take our trading signals. As mentioned previously, the S&P 500 and the Nasdaq are testing major support and we should see some buyers step in here. I advise caution though given the charts of the dollar and yields as well as fundamentals. The bounce is likely to be a dead cat bounce.
There are still resistance levels on the daily chart that I need to see be taken out before I can confirm a trend reversal.
What would I be watching for if I were to buy at these support levels? It might not be what many expect to hear, but I would watch for a boring and dull market range to establish. And I want to see multiple days of this. If both the S&P 500 and the Nasdaq range here, it would be a sign that selling pressure is exhausting, but doesn’t count out the fact that the sellers could be waiting at higher levels! But, this would be a strong base for bulls to work with.
As you can see from the Dow Jones chart, the breakdown has already occurred and we have new lows for the year. Things are different for the Dow Jones and there are two ways to play this.
First, either the Dow Jones reclaims broken support closing back above 29,900-30,000. If this were to happen, it provides a stronger case for markets finding a bottom here.
Second, the Dow Jones continues to sell off on the retest of what was once support now becoming resistance. This retest is happening NOW. Generally, sellers would pile in and drive price further down, taking out the lows printed on September 26th. If this were to happen, then we can expect other stock markets to break below their support and head lower.
Major support areas are being tested right now and could see prices range before beginning a new uptrend. Keep an eye on those 10 year yield and dollar charts. A pullback is great for stock markets, but both of those charts still scream uptrend which translates to more pain for stocks.