Lest it has escaped your attention, the stock market is coming off of a wild week. It was a week of volatility, with the S&P 500 gaining over six percent from its Monday low in the first three days before turning tail and giving that back to finish roughly flat by Friday’s close. In some ways, because the net result was basically nothing, it is tempting to say that that was a lot of sound and fury but not really much else. That, however, would be a mistake. That kind of volatility in one week, even if the net impact is minimal, often precedes a big move the following week.
The year-to-date chart indicates that that could well be the case this week, not for any complex, technical reason, but just because all the jumping around left us right at the level of the low so far this year at around 4115, marked on the chart by the gold, horizontal line.
There are three options from here.
First, the YTD low could hold, in which case that support level starts to look even stronger. In this kind of big picture look, that doesn’t mean that the exact number has to hold, just that we recover from somewhere around here and finish this week higher. Second, it could break completely, leaving stocks trading in a new, much lower range, where that level becomes the resistance point and the early 2021 lows around 3700 become the next support level. The third option would be that we see more of the same, with a lot of volatility for little end result. In that case, the support could well be broken, maybe on a couple of occasions, but it would basically mean nothing until a longer-term direction was established.
All of that encapsulates the biggest problem with chart analysis: while it can suggest certain scenarios and levels to watch, it isn’t really predictive most of the time. Which of the above three possible things actually happen in the stock market this week depends on fundamental, not technical factors. However, most of those are now in then category of “known knowns.”
We know, for example, that the Fed is going to raise rates at a fast pace but sticking to 50 basis point hikes rather than 75, at least for now. We also know that Russia will continue to wage war in Ukraine, and that China will slowly reopen as they gradually retreat from the “zero tolerance” Covid restrictions. In addition, Friday’s job numbers tell us that, inflation notwithstanding, the underlying economy is strong with ultra-low unemployment.
The uncertainty that was present early last week is now largely gone, so logically stocks should continue to follow the downward path from the end of the week. There is, however, one thing that could come to investors’ rescue: earnings. We have already heard from most of the big names as to their Q1 2022 performance, but there are still enough left to report to make a difference to the market’s perception of where we are right now.
Even just a hint of optimism from firms in key industries like Simon Property Group (SPG) and Microchip Technology (MCHP), which report after today’s close, would reassure traders, while Sony (SONY) and Toyota (TM) on Tuesday and Wednesday could give insight into Asian economic conditions, as will Alibaba’s (BABA) results that will be released on Thursday. And perhaps the most influential in some ways given the extreme pessimism around the media and streaming landscape, will be Disney (DIS), which reports Wednesday.
The thing is though, as traders have shown that their default position is to sell in the current conditions, it would probably take most if not all of the above to report good results and give a positive outlook for stocks to rally strongly. That is extremely unlikely, so this looks like at least the beginning of this week could be another rough one for investors.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.