Equity markets are popping the day before January 2023 CPI. US markets have been showing strength after Jerome Powell mentioned the word ‘disinflation’ at the previous Fed press conference. The markets seem to think disinflation will continue to be the theme with the upcoming CPI report. At time of writing, the S&P 500 is up 0.92%, the Nasdaq 1.41% and the Dow Jones 0.97%.
In this article, I will take a look at the technical setups I am seeing on all the equity markets I follow and personally trade.
There are two US stock market charts which show very strong bullish technicals. The S&P 500 is one of them. The S&P broke out of a downtrend line this year on January 23rd 2023. The retests saw buyers jump in and respect the broken trendline. We now have broken above a major resistance zone which I have highlighted in blue.
The breakout saw a few days of gains and then stalled. We then had an initial retest which saw a bid on February 7th 2023, but then a strong sell off. Now, once again we are undergoing a retest which is seeing the bulls jump in before CPI.
I will have to admit, I do not like the fact that the S&P stalled on a breakout and the initial retest saw weakness. I would rather see a move higher post breakout fairly early, rather than wait after a week of trading.
How would I trade this? Wait for a higher low to be confirmed, which means a candle close above 4200. Yes, you may miss some of the move, but the probabilities of success on the trade is higher on the confirmed break. In a business of probabilities, which is what trading really is, this is what it is all about. I am not looking for the perfect bottom and top trade and ride the entire move. I look to enter when my criteria is met and ride the wave.
The second most bullish looking US stock market is the Nasdaq. The tech stocks really saw action as the markets began pricing in a Fed pivot and disinflation. Rising rates hit tech stocks the hardest since most are not making profits and need to borrow money to operate.
Just like the S&P, the Nasdaq has broken above the trendline with a successful retest, and broke above the major 12,000 resistance zone. The retest also saw buyers jump in. As long as we remain above 12,000 the uptrend continues. There is a possibility of a pullback to retest 12,000 once again post CPI.
The way to play this would be to wait for a close above 12,700 and ride the confirmed higher low. Those who don’t want to be patient would enter and place their stop loss comfortably below the 12,000 level.
The Dow Jones is the market I am closely following when it comes to macro and geopolitical themes. The S&P 500 can be summed up as domestic US money. The Nasdaq as the retail market. The Dow Jones is foreign money. When money flees Europe and Asia due to geopolitical uncertainties, expect it to flow into the Dow Jones since foreign money invests in the best dividend paying stocks.
Last year in October, the Dow Jones made a huge move which clearly was much larger than that of the S&P and the Nasdaq. I see this as international money flows running into the US… and potentially a warning of what may be coming in other parts of the world particularly Europe and Asia.
Since that big move, the Dow hasn’t done much. It remains in a range and we await the break. It is not moving with the S&P and the Nasdaq and most traders blame earnings. For bulls, the breakout above the range is what you are looking for.
I follow the US small cap Russell 2000 index for one major reason. This market tends to lead all other US markets. So when the Russell breaks out, it means that the major three US stock markets are likely to follow.
The Russell is still in uptrend bullish mode as long as we hold above 1880. It is also undergoing a retest like the S&P and the Nasdaq. If we were to close below 1880, then it would not bode well for all US markets.
Here in Canada, the TSX is showing some topping signs which have Canadian traders and investors a bit worried. We must remember that our market is largely composed of energy, so when oil prices drop, the TSX tends to follow along. The opposite is also true. For you commodity correlation investors, the Russian market, the Canadian market and the Norwegian market closely move with the price of oil.
But I am not saying this is a bearish setup. The TSX has closed above a resistance zone at 20,500 but there has been no follow through momentum which is a bit worrying. If we close back below the 20,500 zone, then we would have a breakdown. Alternatively, a close above 20,850 gets us resuming the uptrend and takes us to an eventual retest of previous all time record highs near 22,000.
Over in Asia, the Japanese Nikkei saw a breakout on January 20th. We have run into resistance at the 27,600 level. We must break and close above this level for continuation, but I must warn that there is more resistance nearby at the 28,400 level.
Japan has been garnering more attention given the Bank of Japan affecting the global bond markets. It should be noted that BoJ Governor Haruhiko Kuroda is ending his term on April 8th. The new “Prince of the Yen” will be Kazuo Ueda. The Yen initially jumped on reports that this academic economist was tapped to take the big job.
The big question is, will the new Governor be hesitant to change Kuroda’s policies? Or will he be a new hawk? Japan is worth watching and I have written plenty of articles here on Equity Guru explaining why.
Things are interesting over in Europe. The German Dax has recovered a very important zone. What was once resistance at 15,200 has now become support once again. Not the major head and shoulders pattern neckline back in late 2021 early 2022. This recovery is important from a technical perspective.
Going forward, the Dax remains bullish above 15,200. As long as we remain above this level, we can test previous all time record highs.
Record highs might seem crazy in Europe given inflation and conflict. But let me end with two surprising European charts:
Guess what stock market has already made NEW ALL TIME RECORD HIGHS. If you guessed the UK FTSE, you guessed correctly. Yes folks, the UK stock market is ripping. New all time highs have been printed. The Bank of England still remains hawkish, and Brexit is impacting UK growth by 29 billion Pounds. British stocks seem to not care.
We will end off with these two charts. The French and Italian stock markets. Both have broken out. More importantly, they are very near previous all time record highs. In the next few days, these markets could follow the UK in making new all time record highs.
It seems from an investing standpoint, the European markets seemed cheap which has caused buying to take us to these levels. Some of us perhaps think there is a disconnect between European markets and the European economies. But from a technical perspective, these look bullish.