Stocks post gains in the calm before the earnings storm

 

Jan. 11, 2019 – Stocks finished another week in the green. Providing further confirmation, at least in the near term, that the volatility we saw in the fourth quarter is on the wane. 

Between the government shutdown and earnings season right around the corner, this week was light on data. What we did get was even more of the soothing language about “patience” from the Federal Reserve. A number of speakers echoed Jerome Powell, the central bank’s chairman, in saying the Fed will be paying attention to the data, but sees little evidence of an impending spike in inflation and thus can afford to be patient as it normalizes interest rates.

This week also saw the conclusion of some preliminary trade talks between the U.S. and China. The talks were apparently successful enough that they were extended to a third day, but the statements released after the conclusion contained no specifics about anything that was agreed to. These talks were meant to set the table for additional talks later this month between higher-level officials. Negotiating for the U.S. will be Robert Lighthizer, the U.S. trade representative. Lighthizer has traditionally been pretty hawkish about China policy, so it will be interesting to see how negotiations progress once he takes the reins.

Next week brings the start of earnings season, with Netflix (NFLX) and some big banks reporting. We’ve already gotten a nasty preannouncement from Apple (AAPL) and some ugly holiday sales figures from Macy’s (M) and J.C. Penney (JCP). On the other hand, General Motors (GM) raised it’s guidance today.

This earnings season seems likely to be a mixed bag, with some strong results, and some weak results.  What will be more interesting is the market’s reaction to the reports… In 2016 and 2017, the market seemed willing to overlook any bad news. If there was a way to spin the quarter as positive, stocks were getting bought. That pattern didn’t hold up in 2018 as investors seemed less willing to accentuate the positive and more inclined to focus on the negative. 

That pattern could continue this time around, with some analysts already talking about the advisability of companies reporting “kitchen sink quarters”, which is the practice of reporting all the bad news you possibly can so that the next quarter is more likely to be better than expected. If we get a lot of those, we’re likely in for a rough couple of months. However, if results end up being better than expected, stocks could rally, especially given how far valuations on some names have fallen recently.

Indices

All told this week, the S&P gained 2.45%, the Nadsaq rose 2.89%, and the Dow Jones added 2.69%.

The strength we have seen in the market since Christmas will likely be coming to an end. Not to say that the market will stop recovering, but that we will likely see a slowing of momentum. The past few weeks of strength were wildly unpredictable, with huge moves and intra-day swings, drastic gaps at the open, and equally impressive moves to the upside as the downside move we saw in December.

Such strength has boosted market optimism and helped to confirm that we’ve possibly found a bottom, but those large moves to the upside have all the major indices pressing strong levels of resistance. Current levels could really make or break the market. It will take some bullish muscle to push through resistance, but should the indices break through, they will gain some much-needed levels of support with strength. Should the markets fail at these levels, it could send the indices tumbling… again.

This week we will be looking at all the major indices on one-year charts. The charts are littered with resistance, but we will be focusing on stronger levels of support and resistance, as well as the 50-day moving averages. These charts can be deceiving since the market has moved so drastically in such a short amount of time. These lines of support and resistance look fairly close together, but are relatively far apart. The scale of these charts is wide as we are trying to display a wide range of market levels. When combined with big daily candles it gives the illusion of a normal chart under normal market conditions.

S&P 500

The S&P 500 started to slow during the tail end of the week as it started pressing 2,580-2,600. It did gain the 2,580 as a semi-strong level of support. Hopefully it will be able to maintain, as it could easily fall all the way back to 2,500 if it retreats from resistance. 2,620 is where resistance starts becoming stronger, with levels of resistance closer together. This will be a key level to watch. We would like to see the S&P break this level, gaining the stronger levels of support it will need to continue higher and protecting the index from inevitable pullbacks. The 50-day moving average will be running through thick resistance, and will be another key area to watch when the S&P encounters it.

Nasdaq Composite

The Nasdaq placed itself above a few areas of stronger support around 6,800-6,900. It will also have support from its 8 and 20-day moving averages. 7,000 will be a major hurdle for the Nasdaq, as this is where the stronger levels of resistance start coming into play. Compounding matters the 50-day moving average converges with this level of strong resistance. These will be great levels of support should the Nasdaq find the strength it needs to overcome and will be a great foundation for working its way back to the top. 

Dow Jones Industrial Average

The Dow Jones, like the Nasdaq, has nestled itself above a few key areas of support between 23,600 and 23,800. While resistance can be found at numerous levels above the current price, 24,000 will be tough. This is a game-changing level, and the Dow needs boost itself or risk bouncing between strong resistance and weak support, which could work out badly. You can see how the index really stalled out when encountering 24,000, so hopefully a good open on Monday morning can take the Dow where it needs to be. Once there, 24,400 will be the next major obstacle, as the 50-day moving average is coming together with strong resistance.

Russell 2000

The Russell 2000 has support at 1,400 and 1,440, so the main thing on the agenda for the Russell is the 50-day moving average. The main benefit the index has going for it, is that it can tackle this moving average before it hits major levels of resistance just above 1,460. While resistance is everywhere, additional key levels of resistance start around 1,510, growing stronger and closer together the further up you go. It would be great to see the Russell break through the 50-day moving average and climb above 1,460, as it would be a much safer place for the index to regroup for another run. Should it fail at 1,460, hopefully the levels of support between 1,400 and 1,440 will catch it. Like all the other major indices, it also will find support in its 8 and 20-day moving averages, so things are really starting to look up for the market in general, although tough times still lie ahead. 

Bobby Raines

Bobby Raines

Bobby Raines is the Managing Editor of the Market Intelligence Center. He has degrees in Mass Communications and History from Emory & Henry College. Bobby worked at a mid-sized daily newspaper before making a switch to covering the financial industry full time in the years leading up to the financial crisis. He has been a member of the Fresh Brewed Media team since 2011 and has served as a writer and analyst. You can write to him at braines@marketintelligencecenter.com or follow him on Twitter: @BRatMICenter.

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