Stocks surge off their March 14th lows … the key technical levels to watch today … assessing earnings and inflation … why Louis Navellier is optimistic
On Tuesday, we saw the S&P 500 and the Nasdaq retest their March 14th lows.
Yesterday, both indexes bounced nicely, climbing more than 1% higher in intraday trading. However, toward the end of the day, those gains disappeared. Prices settled back at support levels.
This morning, Nasdaq futures were up 2.6% premarket. That was thanks to unexpectedly strong earnings from Meta and Qualcomm.
But in the morning session, big gains from all three indexes disappeared – the Dow even went negative.
But as the day went on, prices surged. As I write near the closing bell, the Nasdaq is up 3.3%.
***What could be behind the morning weakness is today’s report that U.S. GDP fell at a 1.4% pace to start the year
Analysts were expecting growth of 1%.
It’s important to point out that we should not interpret this as meaning our economy has slipped into a recession and consumers are locking up their wallets.
From CNBC:
…Consumer spending, which accounts for about two-thirds of the economy, held up fairly well for the quarter, rising 2.7% as inflation kept pressure on prices.
The surprise number also reflects an 8.5% pullback in defense spending by the government, which knocked one-third of an entire percentage point off the final GDP reading.
This is something we’ll keep an eye on going forward, but it’s not overly concerning today.
***What’s more pressing today is the price of the S&P relative to a critical support level
Below is a one-year chart of the S&P before the opening bell this morning. You can see it had fallen back to its March lows, which is also where it was trading last spring/summer.
In fact, on a 12-month basis, the S&P is now only barely positive.
Chart showing the S&P at its support level, which is also totally flat on the year
Source: StockCharts.com
So, what happens now?
Well, let’s answer that from a technical perspective.
We’ll start by pulling back to get a 30,000-foot perspective on the market.
***In our March 3rd Digest we profiled “simple moving averages” (SMAs)
We noted that the S&P 500 was approaching a situation in which the 50-day SMA would fall through the 200-day SMA. Technical investors call this a “death cross.”
We pointed out that over the last 10 years, every time the 50-day SMA has fallen through the 200-day SMA, the S&P has seen a substantial pullback. The exception is the 2020 bear market, which happened so quickly (while the recovery was equally quick) that these moving averages didn’t cross until the stock market damage was already in the rearview mirror.
A few weeks after that early-March Digest, this death cross occurred. Below is how it looked at the time.
The blue line is the 50-day SMA. You can see it falling beneath the red, 200-day SMA line.
Chart of the S&P 500 pulling back to its 200-day moving average
Source: StockCharts.com
But shortly after this happened, rather than fall further, stocks staged a furious rally.
From March 15th through March 29th, the S&P exploded 11%. The Nasdaq did even better, gaining more than 16%.
***While many talking heads in the financial press claimed this surge meant the markets were back on track, we were skeptical
We posed the following question in the Digest:
So, is this bullishness a genuine trend reversal and the start of sustained gains?
Well, as we now know, the test of that rally happened and the bulls lost.
In late March, the rally fizzled and markets headed sharply lower, leading to this week’s retest of the March 14th lows.
As I write, we’ve just bounced off this critical level for the S&P. Whether it holds will have a big influence on short-term market direction.
That’s why today’s monster rally is so welcomed.
***Below, we look the two-year chart of the S&P 500 overlaid with the same 50- and 200-day SMA lines
I’ve circled the recent death cross and added support and resistance lines.
Chart showing the S&P with new trend lines, bouncing off resistance
Source: StockCharts.com
Several things to note.
First, if the S&P is going to regain solid footing, it needs to hold this 4,200 level, as we just noted. If it doesn’t, there’s a lot of open room to fall beneath us.
Yes, today was a great bounce. But we could see prices retest this level over the coming sessions.
If we do hold this level, great – that suggests we could see some sideways trading action (within the trendlines superimposed above), wherein stocks form a base and begin building strength.
If 4,200 doesn’t hold, that suggests the completion of a “rounded top” pattern, such as the one below (blue dotted line), which would put the S&P on a trajectory of lower highs and lower lows (red dotted line).
Chart showing the path that the S&P might take if it doesn't hold support at roughly 4200
Source: StockCharts.com
That would increase the odds of even more losses.
***We have the tailwind of today’s rally starting from near-oversold conditions working in our favor
You can see this by looking at S&P’s Relative Strength Index (RSI).
This indicator measures momentum, with a reading over 70 suggesting “overbought” conditions and a reading below 30 suggesting “oversold” conditions.
Many times, when RSI levels reach these overbought and oversold levels, they reverse, mirroring a change in the direction of the asset’s price.
As you can see below, the RSI of the S&P was below 34 before the bell this morning. That was close to oversold, suggesting a bullish reversion.
Chart showing the RSI of the S&P in the morning at 33, almost oversold
Source: StockCharts.com
What’s interesting as that as I write in the wake of today’s rally, the RSI has exploded to nearly 44 as you can see below.
Chart showing the RSI in the afternoon at nearly 44
Source: StockCharts.com
If the S&P’s RSI can break north of 50 and hold that level, it’ll be a great sign of strength.
***Let’s highlight a few technical levels to keep on your radar as we look for more gains
The first is the 50-day SMA. After today’s rally, that’s now only about 2% above where we started today.
The test is whether the market can pierce that level, hold it, then turn it into a floor of support as it tries to climb even higher.
After that comes the 200-day SMA, about 4.5% higher.
Finally, there’s the top resistance band around 4,700, roughly 9% higher.
Though today’s surge is great, we don’t necessarily want a moonshot “straight up” rally like we saw in mid-March. Rather, we want smaller, gradual moves higher that pull back slightly, find support, then continue a “higher high and “higher low” pattern would show true strength.
So, what will impact whether or not such gains come?
Perhaps the two biggest short-term influences will be earnings and inflation.
***The latest on earnings and inflation
We’re still early in the earnings season and things could break either way. That said, so far, results are mixed to pretty good.
FactSet is the go-to earnings analytics group used by the pros. Below is their latest analysis from last week (we’ll get lots more info tomorrow):
Overall, 20% of the companies in the S&P 500 have reported actual results for Q1 2022 to date.
Given this mixed bag, we shouldn’t bank on excellent earnings as a driver to push the entire market higher. Though, we could see specific sectors and individual stocks surge due to strong earnings (think energy and Meta this morning).
***As to inflation, are we nearing a peak?
For that answer, let’s turn to legendary investor Louis Navellier.
Louis notes that we do need to keep an eye on what’s happening with Russia.
Moscow is doing considerable saber-rattling, even referencing the potential use of a nuclear weapon. Clearly, the conflict is nowhere close to being over and the situation remains highly unpredictable.
Plus, Russia has now cut off natural gas to Poland and Bulgaria, allegedly because the countries won’t pay in Russian rubles, as Russian President Putin has demanded. If Putin chooses to weaponize Russian energy, stopping shipments to Europe, it would almost certainly cause a global recession.
Despite this wildcard, Louis remains bullish about where we are today.
As to that bullishness, keep an eye on the technical levels we highlighted above. They’ll help you monitor the progress of a potential rally over the coming weeks.
