On Wednesday, July 27, 2022, the FOMC raised the Fed Funds rate for the fourth time this year. The next day, the Bureau of Economic Analysis (BEA) announced that the 2022 Second Quarter GDP declined by 0.9%. Finally, to close out the week, the BEA reported that the Core PCE rose by 4.8% from a year ago on Friday. Despite these adverse events, the main equity indices have continued their upward march.
Resistance at Congestion Areas and the 100-D SMAs
The major indices bounced off multi-month lows in mid-June and formed bullish chart patterns. However, they are now facing some overhead resistances, which will test the strength of the current rally.
Dow Jones Industrial Average
On June 17, 2022, the Dow Jones Industrial Average ($DJIA) made a low of 29,653.78, which tested the support of 29,568.57, the all-time high level before the Covid-19 pandemic. This was the lowest that the DJIA had seen since December 2020. The decline from the all-time high of 36,952.65 was -19..8% and near the 38.6% Fibonacci retracement of the rally from March 2020 to January 2022.
Since then, the index has bounced up more than 11.2% to a resistance zone. The upper bound of the resistance area, 33150.33, is the low of January 24, 2022, the first leg down of the current bear market. The index moved around this level for a few days in late February, early March, early May, and late May (See Fig. 1). The 100-day SMA, 32,727.04, is another resistance level above the index.
The Stochastics (9,1,3) oscillator is forming a Bearish Divergence. The %D was 98.34 when the index made a high of 32,219.25 but could reach only 91.05 during the next upswing.
If it retreats from these resistance levels, the DJIA could find support between 32,250 and 33,1700, a previous congestion area.
The last pattern that DJIA formed is the ABCD pattern.
- ‘A’ = 29,653.29, the low on June 17
- ‘B’ = 31,885.09, the high on June 28
- ‘C’ = 30,143.93, the low on July 14.
- The 100% extension target near 32,375 is achieved
- The 161.8% extension target is near 33,750, which is 14% above the low on June 17
- The 261.8% extension target is 35,986, which is 21% above the low on June 17
These levels will come into play if DJIA clears the current resistance zone.
On June 17, 2022, the S&P 500 declined to 3,636.87 (see Fig. 2), between the 38.5% and 50% Fibonacci retracement levels of the rally from March 2020 to January 2022. This low was -24.5% decline from the all-time high of 4,818.62. It was just above the December 2020 low.
Since then, the S&P 500 has bounced up nearly 14.0%, matching DJIA’s swing high and swing low days. It is facing overhead resistance, too, though its resistance is at the February 24 low, coinciding with the congestion areas formed in early May and late May. The 100-day SMA is another resistance, and the Stochastic is also developing the Bearish Divergence.
The ABCD pattern of the S&P 500 :
- ‘A’ = 3,636.87, the low on June 17
- ‘B’ = 3,945.86, the high on June 28
- ‘C’ = 3,721.56, the low on July 14.
- The 100% extension target near 4,040.55 is achieved
- The 161.8% extension target is near 4,221.51, which is 16% above ‘A’
- The 261.8% extension target is 4,530.50, which is 24.6% above ‘A’
The NASDAQ Composite is more volatile than S&P 500 and DJIA. It has gone through more swings in declines and in rallies since January 2022. It peaked before them on November 22, 2021, and bottomed earlier on June 16, 2022 (see Fig. 3). NASDAQ found support at the lows of September 2020, just above the 61.8% Fibonacci retracement level of the rally from March 2020 to January 2022. Its low was down -34.4% from the all-time high.
After making the low, the NASDAQ Composite bounced up nearly 17.5%, with more swings than S&P 500 and DJIA. The resistance it faces is the March 14 low of 12,555.35, between the congestion area formed in early May and early June. Like the other two indices, it is at its 100-day SMA, and its Stochastic oscillator is giving a Bearish Divergence signal. If it retreats at this level, the probable support is around 11,550.
The chart pattern formed by NASDAQ is not a classic ABCD pattern, though it is more like the ‘W3’ wave pattern that Arthur Merril used. The index’s following few likely resistance levels are near 13,000, 13,700, and 14,600. These levels are 23%, 30%, and 38% above the low on June 16.
The small-cap index, Russell 2000, topped on November 8, 2021, at 2,458.86. It then declined to a low of 1,641.47 on June 16, 2022, a fall of -32.8%. Russell 2000’s low was just below the January 2020 high of 1,652.32 and below the September 2018 high of 1,740.80, which was then an all-time high. It declined to a level between 50% and 61.8% Fibonacci retracement levels of the rally from March 2020 to January 2022.
Since making the low on June 16, the Russell 2000 has bounced up nearly 14.6% (see Fig. 4). Its current level is at the resistance below the February 24 low and the 100-day SMA, which falls within the congestion zones of late April, early May, and early June. Its Stochastic is flashing the Bearish Divergence. A retreat from this level may find support at around the 1,780 level.
The ABCD pattern of the Russell 2000:
- ‘A’ = 1,641.47, the low on June 16
- ‘B’ = 1,792.58, the high on June 28
- ‘C’ = 1,680.40, the low on June 30
- The 100% extension target near 1,831.51 is achieved
- The 161.8% extension target is near 1,924.89, which is 16.5% above ‘A’
- The 261.8% extension target is 2,076.01, which is 25.6% above ‘A’
NASDAQ is Leading The Market Higher
The DJIA is the laggard index, and NASDAQ Composite is the leading index, with Russell 2000 as the close second.
From April 2022 to June 2022, $DIA, the SPDR Dow Jones Industrial Average ETF, performed better than $SPY, SPDR S&P 500 ETF (see the first panel of Fig. 5). It also outperformed $QQQ, Invesco QQQ Trust ETF (see the third-panel Fig. 5), and $IWM, iShares Russell 2000 ETF (see the sixth-panel Fig. 5), from November 2021 to June 2022. However, since June, $DIA has been lagging all three.
Technology and Consumer Discretionary Are the Leading Sectors
Technology and Consumer Discretionary are the leading S&P sectors.
The $XLY, Consumer Discretionary Select Sector SPDR ETF, has been leading the $SPY since mid-May (see the first panel of Fig. 6), whereas $XLK, Technology Select SPDR ETF, has been leading the $SPY since mid-June (see the second panel, Fig. 6).
$XLI, Industrial Select Sector SPDR ETF, has started to outperform the $SPY since mid-July (see the fourth panel, Fig. 6). The performance of $XLE, Energy Select Sector SPDR, is on par with $SPY (see the third panel, Fig. 6).
The Consumer Discretionary sector is leading the Technology (see the fifth panel of Fig. 6). The Industrials are either matching or slightly outperforming Technology (see the sixth panel of Fig. 6)