“…1000 point intervals around the DJI acted as significant near term support and resistance. But a pattern has emerged around the 34,000-35,000 area which is similar to the behavior the DJI exhibited around two other psychological round number levels – 30,000 and 31,000 – from November 2020 to March 2021 … a breakout in above 35,000 would complete the bullish ‘head and shoulders’ reverse, with a targeted move to 36,710 within three months“
– Outlook for Monday morning, August 2, 2021
Last week I detailed a trend I am noticing on the Dow Jones Industrial Average (DJI – 35,208.51) in regards to its multi-month battle at 35,000 and the potential bullish implications. While the DJI has yet to make a convincing and sustained move neither above nor below this level, my attention this week turns to the Nasdaq-100 index (NDX – 15 109.36), which is beats in its own thousand-year-old domain; 15,000.
As of July 2020, NDX has crossed 11,000, 12,000, 13,000 and 14,000 psychological round numbers. Since mid-July, and coinciding with the DJI battling 35,000, the NDX has attempted to take a convincing step above 15,000.
While the NDX’s 13,000 level was withdrawn with relative ease last January, it still came into play until May, when it served as a support. But note that 11,000, 12,000, and 14,000 have proven to be more difficult to overcome. The 14,000 are the most intriguing of all, which is also about double the closing low of early 2020 at 7,000. It is at 14,000 that a 7% two-week decline began, before it began to fall. Another millennium level, 13,000, does not serve as a trough.
As we move into about a month with 15,000 serving as a cover, one of the risks is a repeat of the action that occurred around 14,000, in which a pullback to the previous millennium zone has occurred. before a possible break. If such price action is imminent, hovering just below 14,000 is the 120-day moving average for NDX, which served as support in early March and mid-May.
I’m talking about this now not only because the DJI is battling 35,000 simultaneously, but because two previous NDX pullbacks have occurred against the backdrop of the weak bond market.
Even though the NDX rose above 15,000 last week to its late July high, the bond market showed weakness, attributed to remarks from two key Fed governors. Fed Governor Christopher Waller described what he saw as a factor that could contribute to a decline in bond purchases that will begin in September, when he said two payroll figures above 800,000 could be a trigger. Friday’s payroll was above this threshold. Additionally, Fed Vice Chairman Richard Clarida noticed a take-off regarding an interest rate hike at the end of 2022, earlier than the Fed’s 2023 dot-plot indicated in a meeting. former.
According to the chart below, the iShares 20 Plus Year Treasury Bond ETF (TLT – 147.78) fell below its 20-day moving average, which has suffered several withdrawals since early June. If the TLT breaks below $ 147.31, which is 10% above its March closing low, or comes back below its 200-day moving average, the risks may increase for another NDX pullback, attributed to rising interest rates.
This scenario is worth watching, especially with the buy (to open) put / call volume ratio on NDX components recently reaching an extremely low level. As this ratio bottomed out in early July, it may take the NDX to drop below the early July low of 14,600 before optimists start to feel the pain leading to a more serious denouement of the l technological optimism of large caps. If you want to hedge a short-term pullback in NDX-linked stocks, you can buy QQQ puts, as the 30-day implied volatility (IV) reading is within half a percentage point of its 52-week low, according to TradeAlert data.
“The impact of the delta increasingly threatens certain parts of the American economy”
-Bloomberg, August 5, 2021
“BofA’s Carey Hall says equity sentiment is approaching ‘sell signal'”
-Title Bloomberg, August 6, 2021
Regardless of how ‘tech-land’ plays out via NDX in the short term, it is a rotating market, meaning investors simply turn to other groups if a group suddenly becomes out of favor. .
Therefore, I still expect the SPX to continue trading in its bullish channel that I posted every week, even if the technology suffers a pullback or period of underperformance if bonds continue to fall.
Economically sensitive stocks, for example, have held up, despite growing concerns about the economy, whether the concerns are related to the Covid-19 Delta variant or a policy error by the Fed. Sentiment concerns also abound, implying that market participants using sentiment as a tool to anticipate the market are either hedged or sidelined, which may involve lower risk than that which appears on the surface in which concerns the market at large.
We also find value in sentiment indicators, but we strongly believe they should be used in conjunction with price action. As such, the current sentiment backdrop should be more important in the event of a technical failure in equity benchmarks. Such a deterioration in the technical environment could mark the beginning of a relaxation of optimism that so many people have been in the process of for months. Yes, optimism is likely to persist at both short-term and long-term highs, but such optimism can persist longer than expected, which it has in this environment.
“If the Dow Jones breaks out and maintains a move above the 35,000 resistance, I would expect at least the S&P 500 (SPX) to be trading in the bullish channel that has been in place since mid -November… For the short term that traders are shaken up and shorts are bolder after months of hedging activity, I think it will take at least a week of continuous trading below its channel… 4,475 est double last year’s closing low of 2,237.40.
– Outlook for Monday morning, August 2, 2021
The above excerpt brings me to the chart of the S&P 500 Index (SPX – 4,436.52) that readers of this review have seen weekly and is worth paying attention to.
I continue to see 4,475 as a potential hesitation and / or a level that sellers may emerge from, as this is double the 2020 closing low and is just below the 4,500 half-century mark. The top of the channel is between 4,480 at the start of the week and 4,498 at the end of the week.
If sellers emerge in the areas discussed above, I think it will take a long period of time that the SPX is trading below its nine-month bullish channel for more damage to occur on stocks. This coming week, the low of this channel is between 4,345 and 4,360, and the popular 50-day moving average is below this zone in the 4,300 zone. Its 80-day moving average is at 4,250 and marked the trough in March. In other words, it will likely take a pullback of more than 4% below 4,250 to shake longtime optimists.
As it stands, the technical backdrop supports the prevailing optimism.
Todd Salamone is Senior Vice President of Research at Schaeffer