Day traders are moving this market more than the Federal Reserve. Earnings season is upon us and so far, Goldman Sachs is kicking things off strong. Netflix earnings are out later post market, and the NFLX set up looks prime.
Earnings this quarter is a real test. Traders are acting on earnings and asking themselves: 1) Is the US economy showing signs of slowing down? 2) Is the stronger US dollar going to impact US corporate earnings? 3) How are supply chains affecting costs and inputs for companies? 4) What is the forward guidance management is putting out when considering a stronger US dollar, high inflation, rising interest rates and supply chain issues?
All of these are important questions that require one to dig deeper in the earnings report. Too many times have I seen day traders jump in on media headlines of “earnings beat” without looking at the full picture.
Just look at today’s price action on Goldman Sachs which had an “earnings beat” headline. Nice gap up, but the stock has given up a lot of the gains, and we still have a lot of time left in the trading day at time of writing.
What should be on your mind is the Federal Reserve and other central banks. Especially now that inflation numbers are still high, even with the Fed taking interest rates up to 3.25%. I expect the Fed to be aggressive and hawkish when it comes to raising rates. If the Fed pauses and begins cutting rates too soon, then inflation will spiral out of control. The Fed really needs to raise rates high enough to cause a severe recession to kill demand.
Will it work? Perhaps. I am not even mentioning the fact that governments will need to pay more on the debt with higher interest rates. Just think about how indebted many western governments are, and how crazy their spending is currently. More debt means more interest payments at higher interest rates. Governments tend to increase taxes to deal with this. But I am getting far ahead of myself.
The next Fed rate decision comes in a few weeks time. Circle Wednesday November 2nd on your calendar.
Currently, Fed Fund futures are showing a 100% chance of a rate hike. It appears it will be another large 75 basis point rate hike as well. The interesting part is what comes next.
For December, the markets are beginning to price in another rate hike. The debate is whether it will be another large one, or perhaps a smaller one. We still have a lot of time until December 14th, and Fed futures probabilities will continue to fluctuate as we get closer and the markets begin to price in the size of the December rate hike.
This is all great, but the key is the FOMC press conference, where Fedchair Jerome Powell takes the stage and analysts and traders listen carefully to every single syllable that comes out of his mouth to determine whether he is ‘hawkish’ or ‘dovish’. Macro jargon that just means whether Powell will be aggressive with monetary policy (hawk) or chill (dove). Hawkishness generally points to more downside and more rising rates.
I have said this many times before on Market Moment, but many traders continue to bet on the Fed Pivot. That sooner rather than later, the Fed will pause raising rates and perhaps begin to cut rates due to a recession. They have a good case of course given the fact that higher interest rates will likely break something and cause governments to pay more for the debt at a time when they are spending more and more.
We also have recently seen the bond markets break in the UK with no single bid for British debt and the Bank of England having to jump in and buy bonds to keep the long end of the bond market stable. At a time when they were going to stop purchasing bonds. The Bank of England says they will do this ‘QE’ even when they are raising interest rates. Many traders may call their bluff.
But this again leads back to inflation. Central banks must continue to raise rates higher because a pause or reversal would mean inflation continues to spiral out of control. You should be betting on whether the Fed is dead serious on taming inflation. To me, it appears that they are. The only thing that would change this would be a major demand killing event such as Covid lockdowns in Fall/Winter or perhaps something worse due to the current geopolitical climate of the world.
This was a very long way in saying don’t count on a market reversal just yet!
Readers know that I strongly advocate technical analysis. While many analysts have been coming up with reasons and excuses for market pops and drops, the technicals tend to show a clear picture on why things happen in the markets.
In my latest video, I outlined the major weekly resistance zones that US stock markets need to close above to start giving us a good indication that a reversal is coming. We do not have that yet, and this relies on waiting for the Friday weekly candle to close.
I also outlined the levels which would need to break before going long as a trade. Let’s go over them.
You will notice a couple of things. Firstly, markets are selling off (some near our key zones!), and the structure for all three major markets look the same.
Let’s start off with the daily chart of the S&P 500. As you can see, this market battled at a support level. We were at one point dropping like a rock on October 13th (when CPI data came out higher!) and saw the miracle reversal. Markets did not sustain the momentum until the day after. Today also saw an early market pop which has seen us sell off at a key zone.
The 3800 zone is my current resistance zone. Not only that, but it is the previous lower high in this daily downtrend chart. In market structure theory, a downtrend remains intact as long as its previous lower high is holding. When price closes above the current lower high, the downtrend is over and we begin a new uptrend.
So for the bulls: we aren’t quite ready to call a reversal. The positive thing though is there is a chance markets just range here and eventually breakout which would give us a double bottom pattern. Wait for a daily candle close above 3800 and you are set.
There are two levels I am watching on the Nasdaq. First the current resistance at the 11,200 zone. This was previous support which has now become new resistance. I am not surprised that sellers are stepping in here. Just typical breakdown and continuation price action.
The Nasdaq’s lower high comes in at 11,600. However, if we do manage a strong close above 11,200 then there is a good chance that we can break above 11,600.
Perhaps the best bullish case comes from the Dow Jones. This chart shows signs of basing just like the S&P 500. It also shows price breaking above its current resistance at the 30,000 zone. However, today’s price action (as it stands at the time of writing!) is not showing a strong breakout. This could change depending on how the candle closes by the end of the day.
If it closes like this, then we would not say this is a strong breakout candle.
There you have it. US stock markets (and other global markets) are showing signs of a range and a potential reversal. Key levels still need to be taken out. Traders should be careful because if these levels mentioned above are not taken out, the downtrend stands, and these areas provide a great entry for shorting when also considering the fundamentals that is rising interest rates.
As I always mention to my readers. The two charts to determine where the markets are going are the 10 year yield and the US dollar. There are some early signs of reversals on those charts (which is great for stock markets!), but nothing confirmed as of yet. Sometimes the best trade is just to wait.