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Dow, S&P 500, Nasdaq 100 Forecasts: Bears Brewing as Gaps Fill

Dow, S&P 500, Nasdaq 100 Forecasts: Bears Brewing as Gaps Fill

James Stanley, Senior Strategist

Dow, S&P 500, Nasdaq 100 Talking Points:

  • Stocks are bouncing after futures started the week with another gap-down. US equities are in the process of filling gaps, raising the question of whether bears make a re-appearance at some point later today.
  • While Russia-Ukraine dominates the headlines the economic implication in the U.S. is that there may be some pressure taken from the Fed’s need to quickly hike to tame inflation. We’ll find out more this week as a busy bevy of economic data awaits out of the U.S., with Non-farm Payrolls due on Friday.
  • 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.

It was another large gap-down to begin trading for US equity futures this week. With news of enhanced sanctions and Russia essentially being frozen out of the global economy the expectation was for a quick gasp of risk aversion to show as markets began to trade, and that’s precisely what showed up.

But as we’ve seen multiple times already over the past few months, that fear soon left and buyers jumped back on the bid even with the opaque outlook ahead. One possible source of strength is the expectation that the Fed won’t aggressively hike in the face of possible global war. Odds for a 50 basis point rate hike at the March FOMC rate decision have continued to dwindle as tensions have grown. And before Russia-Ukraine had started to take over the headlines, that was the main speed bump for stocks – a strong shift in the FOMC strategy that could bring upon an unknown amount of tightening this year. Expectations were running as high as 6-7 rate hikes to go along with Quantitative Tightening, and this conflict may be enough to moderate that stance.

Of course, the next operative question is what might happen to inflation. Will it only continue to grow as it has since last year? Will the U.S. support effort entail even more fiscal support, leading to even more USD being printed which could exacerbate the already sticky topic of rising prices? Or, perhaps, will some transitory component begin to show, allowing for inflation to begin to recede before the Fed has to hike more than 2-3 times at some point later this year?

From my point of view, I remain bearish on stocks and the daily chart confirms this view, as last week’s bounce in the S&P happened after fresh nine-month-lows were established. This gives the appearance of last week’s jump as a pullback in a bigger-picture potentially bearish theme.

S&P 500

Support last week showed in the S&P 500 at the 23.6% Fibonacci retracement of the 2014-2022 major move, and resistance played-in from the 14.4% retracement from that same study. But, notably the sentiment shift that’s taken-hold so far this year clearly shows from the daily chart as the higher-highs and higher-lows of 2021 have yielded to lower-lows and lower-highs in 2022.

S&P 500 Daily Price Chart

SPX daily price chart

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

S&P 500 Levels

Shorter-term, the 14.4% retracement looked at above which helped to set resistance last week is confluent with the 38.2% retracement of the recent sell-off. Perhaps more important on the side of resistance is the 50% marker of that major move, plotted at 4455 and just above that, at 4538 is the 61.8% retracement of that recent bearish move. Beyond that, 4573 is a major level as this is a prior swing-low that also helps to mark the February high in the S&P 500.

On the support side of the matter, prices just tested down to fresh nine-month-lows so breaches of that low from last week open the door for downside breakouts. Before that level around 4100 comes into play, however, are supports at 4268 and 4200, with a breach of each keeping the door open for shorter-term breakout scenarios.

S&P 500 Four-Hour Price Chart

SPX four hour price chart

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

Nasdaq 100 Sitting on the Support Shelf

The Nasdaq 100 put in an amazing reversal on Thursday and that move still shows from the weekly chart, with an extended wick sitting underneath price action from last week.

That support came very near the 61.8% marker of the Sept 2020 – Nov 2021 major move, with prices quickly bouncing back above the 50% marker, plotted at 13,712. This gives the appearance of a market that could still test the lows as bounces over the past couple of months have been hit by sellers, keeping the door open for bearish scenarios in the Nasdaq 100.

Nasdaq 100 Weekly Price Chart: Grasping at Support

Nasdaq 100 weekly chart

Chart prepared by James Stanley; Nasdaq 100 on Tradingview

Nasdaq 100 Levels

If this rally can hold a key decision point sits ahead around 14,455. There’s a couple of Fibonacci levels in tight proximity and this could be an ideal area for bears to re-enter the equation. The 14,900 area remains of interest, but the key level of resistance for directional biases is the confluent spot around 15,300. This area hasn’t been in-play for all of February and if buyers can force a break above this spot, the bearish trends that have been driving for the past two months won’t look so attractive any longer.

Underneath current price action, the 13712 level remains key but there’s another Fibonacci level a little lower, around 13,564. And there’s not much between that spot and the 13k level that helped to hold the lows last week, which are very near the 61.8% of that longer-term major move looked at above.

Nasdaq 100 Four-Hour Price Chart

Nasdaq 100 price chart

Chart prepared by James Stanley; Nasdaq 100 on Tradingview

Dow 11-Month Lows

As stocks were falling out of bed last Thursday as panic was permeating the air, the Dow pushed down to fresh 11-month-lows. This is more than the nine-month lows that were showing elsewhere and this also highlights the vulnerability of the index in the event of another wave of risk-off behavior.

For resistance, last week’s high syncs with the 23.6% retracement of the Oct 2020-Jan 2022 major move, and above that is the 50% marker of the sell-off at 34,500. I’m looking for an ‘r3’ at 35,050, which is the 61.8% marker of the sell-off move and confluent with the two-week-high. Invalidation for shorts can be looked at just above, around 35,265.

On the underside of price action, the main spot of interest for me is around 32,676, with another retracement around 32,839 to set a zone. Before that comes into play, 33,268 is of interest and the current nine-month-low of 32,167 is the ‘s3’ that I’m looking at.

Dow Jones Weekly Price Chart

Dow Jones Weekly Price Chart

Chart prepared by James Stanley; Dow Jones on Tradingview

--- Written by James Stanley, Senior Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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