Our analysis on the stock markets from a technical analysis approach has been spot on. In recent weeks, I have told readers (and Youtube viewers!) that the bond charts and the US dollar charts were meeting my criteria for big moves. Moves which would put pressure on the stock markets. The technicals played out and we have had a -5% in the S&P 500 and a -6% move in the Nasdaq. The Dow Jones and Russell 2000 have also fallen.
The stock markets have reached an important zone. They are testing support, or price floor. Zones where we would expect buyers to step in. Now whether we bounce and start a new rally here, or bounce and get a dead cat bounce depends on the moves in other markets. And perhaps some assessment of recent inflation numbers and geopolitics.
We do have some major data points which will impact the inflation/interest rate play. On Wednesday March 1st, we get US ISM Manufacturing PMI data. Then at the end of the week, we have US ISM Services PMI.
Let’s start off with the markets testing major support:
Many eyes or on the Nasdaq, and for good reason. This market should do well on the Fed pivot, however, it seems now that rates still need to head higher. The action in the bond markets is not helping.
We will take a look at the charts of bond yields later, but for now, note where the Nasdaq is. After triggering a double bottom reversal pattern with a breakout on January 27th 2023, price is now retesting the neckline of this reversal pattern. Just a fancy way to say support.
The Nasdaq must hold above this zone in order to sustain momentum and continue a move higher. We have crossed below my moving average, and have seen price action react here in the past three other trading days. We have not seen a major bounce which is somewhat a bearish sign. However, hope remains for the bull, and they really want to see either a large wick candle, or a large green bodied candle to indicate strong buying pressure.
The Dow Jones is also at a key support level. You can see how important this level is. A break below could take us down to the 32,000 level and below. Once again, bulls need to see a strong green candle or a large wick candle indicating that the buyers are jumping in here. a long range would also be a positive sign.
Just like the Nasdaq, the Russell 2000 is also testing a key support level, and has been for three other trading days as well. No breakdown yet which provides bulls with some hope. Now, we watch for a strong green candle.
The current daily candle is a good start, although it would be stronger with a close above 1907.80. I am really interested in the Russell 2000 because this market tends to LEAD the other major US stock markets. Meaning the Russell 2000 moves first, and then the others follow.
The S&P 500 is not quite at a major support just yet, but is very close. A major trendline is about to be retested. I bet some bulls are buying the S&P 500 and nestling their stop losses below the 3900 zone. Below a support zone AND below the trendline.
As long as the S&P 500 remains above this trendline, the bullish momentum remains. A close below this trendline and below 3900 would be quite bearish.
I also want to throw in the European markets. Above are the charts of the German, UK and French Stock markets. Notice that they are also testing major support. Also note that they have not had the large falls like the US markets. We can probably deduce that this move then was more to do with Fed inflation and interest rates than geopolitics.
However, if you are bearish on equity markets then I would consider watching Europe. If these markets break below their current support and range, it would trigger a new downtrend with multiple swings to follow.
Bond yields are going to be the primary driver for US markets. They are pulling back currently which explains today’s green in the stock markets. But we are not out of the trouble zone yet.
The two year confirmed a new candle close high on Friday February 24th 2023. We are very close to 4.88%, which is the wick high on the two year looking to the left on the November 4th 2022 candle. If this is taken out, equity markets will fall further.
If the 2 year closes back below 4.725%, then the probability of equity markets reversing is higher.
The 10 year yield is also not out of the danger zone as it recently broke out on February 21st 2023. The move can continue putting pressure on equity markets. But a close below 3.87% gets bulls excited. The 10 year is now ranging, and the break in either direction will be very telling.
Closely related to the hawkish Fed and rising bond yields is the US dollar. A new uptrend seems to be in play as long as the dollar remains above 103. What this means is that the current red move in the dollar is just a pullback. I cannot say much on the dollar until we close below 103, but as of right now, the pullback likely sees buyers jump in at some point, which leads to a break and close above recent highs.