Traders Watching 4 Pillars Of Stock Market Signals

In this article:

• 4 pillars, earnings report take center stage
• Indexes suffer during quiet before the storm
• Remember the squeeze in market volatility

The Monday morning upside continuation in the stock market turned into a neck-straining head fake.

Media pundits continue jawing back and forth about bulls and bears as the stock market is in a see-saw battle with traders caught in a volatile channel.

Rough data last week followed by a rally Friday and more upside movement to start this week were promising.

If the bullish movement from Friday and early Monday is going to hold, there are four pillars of market action needed to support the direction.

Otherwise, unpack the bear spray.

Watch 4 pillars of stock market signals

The real battle for traders to watch is what happens in the following key stock market signals of market strength and direction. Think of these four pillars in the context of the bulls and bears fighting over market internals.

• Bond market stability – Bullish movement here relies on bonds trading sideways or higher. Negative influences, i.e. recession expectations, may be supporting bonds at this point. Bond stability may not hold for the longer term as shown by yield curve dynamics which are hinting at danger.
• “Junk Bonds” (HYG) – This is not a plot in a B movie, but a precarious stability in this market that is showing potential to roll over. If HYG trades lower, expect the bears to continue winning.
• U.S. Dollar Currency Index (DXY) – Bears have been holding onto the dollar which held higher Monday at 107.43. A high dollar pushes against equities and bullish movement (because of companies having operations overseas where the dollar raises costs.) At this point the dollar remains the strongest trend (higher) in the market.
• Chicago Board Of Exchange (CBOE) Volatility Index (VIX) – The VIX was subdued with sell signals (lower VIX number) entering this week, which is good for bulls. That shifted along with the overall market midday on Monday as the VIX climbed throughout the afternoon and closed at 25.37.

Looking ahead this week, a host of companies will report earnings each day. Simpler’s traders are keeping an eye on banking, semiconductors, and technology. There are also various central bank reports coming up in the next two weeks.

These volatility-inducing events can present opportunities for trading fast moves for swing trading and daytrading. The key is to keep an open mind regarding both sides of the market – bulls and bears.

For some, the outlook in this market action may still lean to the upside. Yet, a sustained bounce through the summer could lead to a rollover into the fall. This would be almost “classic” market behavior amidst the calls that a market bottom was reached and then the market tanks again.

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Indexes suffer, no bottom in sight

Action in the S&P 500 may be hinting at dashing any hopes of a market bottom and sustained movement to the upside.

The S&P 500 fell 0.9% last week even after closing above its 10-day moving average. Internal signals remain in negative territory with the downtrend for the index holding. The movement fits the overall markets which traded lower for most of the week before the Friday rally.

Technology stocks within the S&P 500 have been hit by high inflation. The Consumer Price Index (CPI) report last week showed inflation climbing to 9.1%. This also affected the technology-laden Nasdaq which was down 1.6% last week, and the Dow which also dropped.

Keep in mind that the Nasdaq is down almost 30% for the year, along with the software sector down almost 40% and the semiconductor sector down almost 35%.

Lower price action early last week was driven by faltering earnings reports and economic data showing continued high inflation before positive retail and consumer sentiment data along with large bank earnings boosted the markets higher on Friday.

In the market today, the Dow closed at 31,072.61 points to fall .69% (dropping 215.65 points on the day). The Nasdaq dropped to 11,360.05 points for a .81% loss while the S&P 500 closed out the red day down .84% to 3,830.85 points.

Wild price action over the last few sessions highlights a continued market sensitivity to economic reports. This week the economic event calendar is lighter. Expectations are for earnings reports to take center stage as the second quarter earnings season kicks into full swing.

July is likely to close with more volatility as the Federal Open Market Committee (FOMC) meets July 28. All eyes will be on how high the Federal Reserve (Fed) raises interest rates after the 75 basis points increase last month. Also, the official second quarter gross domestic product (GDP) results from the Fed are expected to be released on July 28.

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A squeeze to remember

Last week the bulls made progress when comparing where the market traded on Thursday morning and the rally Friday. The Nasdaq ended up trading above the daily 21 exponential moving average (EMA) and a key indicator printed green signals on the 15-minute and 5-minute time frames. 

This week the focus is on names with 15-minute squeezes and a bullish buy signal. Keep in mind this market is still in a downtrend, so anything to the upside depends on if the Nasdaq can hold strong with these squeezes firing long. The harsh shift that erased gains on Monday may not align with this focus.

In this wild market, traders should strive to keep stock charts from getting cluttered with too many data points. Simpler’s traders work to use indicators that focus on the “big 3” signals – trend, structure, and momentum.