Nasdaq, S&P 500 Talking Points:
- The Nasdaq and S&P 500 have both broken out to fresh monthly highs as earnings season heats up this week.
- Stocks broke out a couple of weeks ago after an abysmal PMI report and that bullish theme has largely continued since then. Markets are hopeful that slowing inflation and disappointing data may compel a softer Fed. The big question for this week is how impacted earnings have been from the tighter macro environment and how companies are expecting this to impact forward-looking projections.
- 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.
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The Nasdaq and S&P 500 are breaking out to start this week’s trade and this furthers a theme that started a couple of weeks ago, on the heels of a disappointing Services PMI report that was released on Friday January the 6th.
Going into that report, the Nasdaq was grasping on to support at a key longer-term spot of interest, spanning from Fibonacci levels at 10,501 to 10,751. Since then, buyers have very much been in charge with a continuation of higher-highs and higher-lows, with one pause in the move showing last week after encountering a resistance level at 11,700.
At this point, price is testing a trendline as taken from March/April and August swing highs, with the next resistance level a little higher, around the 200 day moving average which is confluent with the prior price action swing around 12,118.
Nasdaq Daily Chart
The 11,700 level has been a key spot for the Nasdaq going back to last May, when it temporarily helped to set the low, after which it became resistance in October before showing up as resistance again last week.
At this point, traders looking for bullish continuation scenarios can look to that level for a hold of higher-low support. That would continue the sequence of higher-highs and lows and this would keep the focus looking towards a move up to next resistance, around 12,118 or perhaps even the Fibonacci level around 12,586. While that second level is quite far from current price, we’re nearing a key point of earnings season which we’ll hear from several tech names like Tesla, IBM and Intel later this week.
Tesla presents an interesting illustration of this case, which I’ll look at below the next chart.
Nasdaq Four-Hour Price Chart
Chart prepared by James Stanley; Nasdaq 100 on Tradingview
Tesla has been a mainstay in the news for some time and after spending years as a market darling, last year saw the company come under intense scrutiny for a multitude of reasons, key of which was leadership’s focus on other variables.
With Elon Musk selling shares to finance his Twitter acquisition there was a massive amount of supply entering the market last year and this is reflected in price as Tesla lost as much as 75% from the November 2021 high down to the January 6th low, which came very close to the 100 psychological level.
But, as the tides have shifted on tech stocks, as illustrated by the Nasdaq’s bullish trend above, Tesla has similarly put in an aggressive bounce with a 40% rally over the past two-and-a-half weeks.
Tesla reports earnings on Wednesday. Elon Musk has a history of using earnings calls to excite his shareholder base and given how badly the stock was beaten down coming into this year, logically, some of this bullish move has been short cover. And there may be more to go yet as this bounce, at least on a relative basis, is still very young. The 23.6% retracement of the recent sell-off is a little higher, around the 151 level on the chart.
Tesla Daily Price Chart
The S&P 500 is also trading at a fresh monthly high with a breakout this morning.
While the Nasdaq came into the year with a bearish lean, the S&P 500 was a bit more equalized as prices had held into a range for a couple of weeks ahead of the New Year open. In the first week of the year, that range tightened into a symmetrical triangle, which finally started to give way after that PMI report on January 6th when traders first began to test the breakout.
The chart has largely been one of bullish construction since then, with higher-highs and higher-lows. There was one period of fright last week when the fresh breakout slipped back into the prior range on Wednesday; but support showed up at a key spot, right at prior resistance in the 3912-3928 level which held through Thursday and into Friday trade.
And then on Friday, as I had warned over Twitter, there was an ascending triangle formation that had built on a shorter-term basis, inside of that spot of longer-term support, and that led to a strong topside breakout to close the week.
That breakout is still running to start this week and the main complication at this point would be chasing the move after the fresh high. There is a spot of nearby support potential, taken from the confluent 4k level which is a psychological level and a Fibonacci level. A little lower brings another support level with some confluence, as the 200 day moving average currently plots to around 3975 which is very nearby the prior price action swing at 3970.
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S&P 500 Four-Hour Price Chart
— Written by James Stanley
Contact and follow James on Twitter: @JStanleyFX