Charts show stocks are at a pivotal point as spring comeback fades and earnings, rate hikes loom

Published Thu, Apr 7 202212:48 PM EDTUpdated Thu, Apr 7 20226:37 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

After the spring bounce, stocks are in a consolidating mode, which means at best they go sideways but could also continue to head lower, according to analysts who watch charts. Stocks dipped earlier in the session Thursday , but closed with modest gains. The S & P closed at 4,500, up 0.% 4Thursday. The Dow Jones Transports, which lost 5.8% so far this week, closed up nearly 0.3%. Health care, consumer staples and energy were the best performers Thursday, while financials, REITS, utilities and communications services were the worst-performing sectors among the S & P major industry groups. "I'm in the camp that we need to be range bound and absorb higher rates, absorb complicated headlines from the Russian invasion of Ukraine and absorb earnings that we're not sure of because of continuing bottlenecks and supply chain worries," said Scott Redler, partner with T3Live.com. Redler said he expects the March 29 high of 4,637 on the S & P 500 will likely be the high water mark through the earnings season, which begins next week. "It doesn't mean we're automatically going to break the lows. It means we're going to trade this range, and we're in no man's land," he said. "It doesn't mean we have to revisit the February low of 4,111. We could back and fill and see a retest of the 4,400 area, which would make sense. Any move below 4,400 you'll start to hear the 'retest of the lows' camp getting louder." Mark Newton, Fundstrat global head of technical strategy, said he is taking a defensive posture over the next couple of months. "I think the second quarter in general is still going to have a lot of volatility," he said, noting he favors utilities, REITS and pharma. "It's right to be in commodities. It's right to be diversified. It's amazing people are still trying to buy these dips in technology. The sector is clearly broken. There's a lot of high growth stocks that are broken." High growth shares were weaker Thursday. For instance, the ARK Innovation Fund was down more than 1.1% at the end of the session. "I think the decline from January is still very much ongoing, and it's tough to make much of the bounce we saw in the latter part of March. Specifically, because we have less than 50 pct of all stocks above their 200 day moving averages," Newton said. The 200-day moving average is literally the average of the closing prices for a stock or index over the last 200 sessions. It is seen as a momentum indicator, and it's a potentially negative sign if a stock or index falls below that level and remains there. The S & P 500 itself is just above its 200-day moving average. There are also shorter-term momentum measures, such as the 21-day and the 50-day moving average. "The S & P reclaimed the 21-day on March 15, which was 4,345. From there you had a 300 handle move to 4,637, which at this time feels like it ended and now traders are in wait and see mode," said Redler. "There's no rush to buy it. It doesn't mean it has to fall apart. The next level is the 200-day which is 4,406." Newton expects the choppiness to continue and does not expect the market to return to its highs anytime soon. "My entire forecast for the year is predicated on the market bottoming out in June, July of this year. Momentum is still negative. There's not much that's participating. FANG stocks have served as a mirage for a little mini rally while the broader market is not all that healthy," he said. FANG stocks include Meta Platforms, Amazon, Alphabet and Netflix, and more broadly Apple and Microsoft. The S & P technology sector is off about 11% for the year so far, compared to the 5.5% decline in the S & P 500. For the week so far, tech is down 2.6%, while the S & P 500 was down 1% as of Thursday's close. "The semis were even weaker than mega or growth tech, which is concerning so we will watch to see if those break down harder to give us clues that tech could follow," Redler said. He is watching Advanced Micro Devices, which closed at $103.72, notching a 0.05% gain. "Watch AMD at the $100 level. That's a big level. Semiconductors are the guts of tech. If they start breaking down, the QQQs usually follow, said Redler. The QQQ , or Invesco QQQ Trust ETF represents the Nasdaq 100. The QQQ rose 0.24% Thursday and is down 2.14% for the week. The VanEck Semiconductor ETF was up 0.02% Thursday and off 4.7% for the week so far, while broader tech in the Technology Select Sector SPDR Fund XLK was down 2.4% week to date. Newton said he's watching both the semiconductors and transports, and both are nearing support. If they hold, that could add some stability to the market in the very near term. "I do think it's important because they are leading sectors. To see them move down as violently as they have of late — transports down 2% a day for the past week," he said. "It's just a severe move for that group, and it puts a lot of pressure on industrials." Tech bellwether Apple was also nearing an important test Thursday, according to Redler. "Apple had a fast and furious move, and now it will be interesting to see if it can hold the $170 area. If it can't, it could also be a drag on tech and the S & P," he said. But he is also watching Tesla and Amazon for leadership. "If any tech stocks have the ingredients to make a new all-time high this year, it's probably Tesla and Amazon. They need time to digest their recent moves, but in the second half of the year, they'll be leading growth again," said Redler. "Tesla just went from $840 to $1,152. It could easily pull back to the $1,000 area. Tesla has been a great leading indicator for the Nasdaq. When Tesla acts well, the market acts well," he said. Tesla closed 1% higher on Thursday at $1,057.26. Frank Cappelleri, Instinet executive director, said the market is at a critical spot right now, after surging in late March. "It was only the 19 th time the S & P 500 was up over 9% in 10 days since 1994," he said. "We know that was a very rare strong run. In the short term, you knew that wasn't going to continue. Now it hasn't, and you have to see if the market can digest it well." He said the S & P 500 is at a pivotal point. "Any low that gets between here and 4,300 will still count as a potential bullish setup. It's not going to take place in the next two or three days. It could be a few weeks. That would be the best case scenario," he said. "You're just digesting the spring rally. If it could digest it in a sideways fashion, that's constructive...I don't hear too many people thinking we're going to new highs immediately." He said investors are likely to be indecisive between now and the next two Fed meetings, as well as the earnings season. "You've had big moves to both sides…that all plays to the wait-and-see mode." The S & P could break out of the "wait and see" period either way. "The steps I'm looking to see happen from a bullish perspective, are have a higher low in place, have the market digest the last two weeks of advancement constructively, go back to 4,600 and go through that area. That would confirm a more bullish formation," said Cappelleri. "The other side is we just see a repeat of what's happened in the prior mean reverting move," he added. "This is just an oversold induced rally within a bigger downtrend. That would tell us we're heading back down to 4,200, 4,100. That would tell us a new down leg is developing."

Traders on the floor of the NYSE, March 21, 2022.

Source: NYSE

After the spring bounce, stocks are in a consolidating mode, which means at best they go sideways but could also continue to head lower, according to analysts who watch charts.

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