Dow Jones, S&P 500, Nasdaq 100 Forecasts: Bear Bounce Near Complete?

10 Year Treasury Note Yield


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

  • Stocks have stepped back from the proverbial ledge after quickly jumping into oversold territory last month. But are equity bears yet done?
  • As Treasury rates continue to rise after last week’s strong NFP report, the bearish side of stocks may come back into favor as investors cast their gaze to rate hikes later in the year. The Nasdaq 100 looks the most bearish of the three major US indices at the moment. Below an apples-to-apples comparison is made amongst the Dow, S&P 500 and Nasdaq 100.
  • 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’s been a cautious start to the week for equity markets with an eye towards earnings reports to be released this week for directional clues. After a strong bearish move developed in January, US equities quickly jumped into oversold territory and for the S&P 500– this was the first such incident since March of 2020, when Covid was getting priced-in.

I looked into this dynamic a couple of weeks ago, ahead of the FOMC rate decision, highlighting just how quickly bears had come into the market. The push point, at the time, was very much on the rates front as strong US Treasury rates were helping to push stock prices even lower and deeper into oversold territory.

The next Monday highlighted some element of capitulation. Bears started the week with a heavy hand, helping to push US indices to fresh lows, with both the Dow and the Nasdaq 100 setting fresh seven-month-lows while the S&P 500 set a fresh six-month-low. But during that session support at oversold conditions began to catch and prices spent the rest of the week in a grinding range.

In the forecast for the next week I looked at the prospect of a bear bounce in US indices, and that led to last week’s thrust higher. Sellers made a re-appearance on Friday, however, and after pushing a bit yesterday the door is seemingly re-opening to short-side themes.

Rates Jump After NFP

Helping that bid behind stocks last week was the premise that the Fed might not have to be so heavy-handed with rate hikes this year, driven by the prospect of a negative print in Friday’s NFP report.

But that negative print didn’t happen; instead, NFP showed a strong headline number to go along with a 4% unemployment rate, and perhaps most importantly for the Fed, Average Hourly Earnings came in at a whopping 5.7%. This speaks right to the inflation factor that’s been pushing the rates theme so aggressively of late, and this puts the Fed in a spot to start hiking come March, perhaps even to the tune of 50 basis points for that first lift-off move.

In response, US rates have driven-higher and at this point the 10 Year Treasury Note is nearing a 2% yield and is currently at its highest level since before the pandemic.

This can help to keep pressure on equities as rates continue to run.

10 Year Treasury Note – Weekly Chart

Chart prepared by James Stanley; TNX on Tradingview

SPX

The blue-chip index is holding support at a key area on the chart, taken from around the 4,440 level. There’s two different Fibonacci levels nearby and this is the area that helped to hold last Friday’s swing-low.

Resistance is fairly well-defined by confluent Fibonacci levels as well, plotted from around 4,580, which is marked by both the 61.8% retracement of the January sell-off as well as the 14.4% retracement of the post-Election major move.

This is where bears are going to need to put up or shut up, as there’s an open door for sellers to take a swing; although equity bears may have a more attractive short-side backdrop in the Nasdaq 100, which I’ll look at next.

For the S&P 500, the next levels of relevance underneath price action are 4,400, 4,353 and then 4,268. A breach of that last level exposes the lows and this brings on bearish breakdown potential.

S&P 500 Daily Price Chart

SPX500 daily price chart

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

Nasdaq 100

I’ve done my best to draw an apples-to-apples comparison here between the Nasdaq 100 and the S&P 500, with related drawings on each chart. Similar to the above, I’m using the post-Election move as the primary Fibonacci retracement (in blue) to go along with a shorter-term Fibonacci retracement around the January sell-off in red. I’ve also plotted the same bullish trendline, taken from the lows around the 2020 election to go along with 2021 swing lows.

Comparatively, the Nasdaq 100 looks a bit weaker and given the rate sensitive of the companies contained in the index, that makes sense. This also highlights how the tech-heavy Nasdaq may be a more attractive candidate for bearish equity strategies.

While the S&P 500 is holding support above the 38.2% retracement of the January sell-off, the Nasdaq remains below that similar level on its own chart.

And, from the longer-term Fibonacci retracement, the S&P 500 is currently holding above the 23.6% marker while the Nasdaq 100 has already fallen down to the 38.2% retracement. The current zone of support for the index stretches down towards 14,375, and a breach of that zone opens the door for a stronger bearish move.

Nasdaq 100 Daily Price Chart

Nasdaq 100 Daily Price Chart

Chart prepared by James Stanley; Nasdaq 100 on Tradingview

The Dow

Despite all of the tumult in the headlines and even rates markets, the Dow Jones Industrial Average has been relatively stable, all factors considered. The index has shown a penchant for mean reversion over the past six months and, as can be seen by the RSI indicator, there’ve been both bullish and bearish signals from the daily chart that have shown ahead of strong moves off of support or resistance.

Of note, however, is the expansion of that range as both higher-highs and lower-lows have printed over the past month, making for a megaphone pattern. Such formations will often show ahead of an expansion in volatility as both support and resistance face stronger tests by traders attempting to break prices out of the range.

As of right now, prices are pretty much towards the middle of that recent range, but the details hold some items of attraction especially when compared to the backdrop in the above two indices.

The Dow is holding support at the 50% marker of the January sell-off, and that same 50% marker was resistance in the Nasdaq 100 last week and later became resistance in the S&P 500. And from the longer-term Fibonacci retracement, the Dow is holding very near the 14.4% marker as short-term resistance, even as the S&P 500 is grasping at the 23.6% marker for support.

Comparatively, this could make the Dow as more attractive for long equity strategies than the S&P 500 or the Nasdaq 100 for those looking to push the long side of equity themes.

Dow Jones Daily Price Chart

Dow Jones Daily 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

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