S&P 500 Approaches 100-Day Moving Average: Is Now an Attractive Time to Buy Stocks? | chart watcher

What a difference a week makes.

Last week, the stock market went up, up, up… up, down, up, down. This left investors feeling uncertain, but the CBOE Volatility Index ($VIX) was not high enough to confirm these fears. This week the market is singing another song that emphasizes the word “down.” Selling pressure has been more dominant this week, especially in the technology sector. Does this mean bears are coming out of hibernation?

macro environment

We heard from two Federal Reserve chairs, John Williams and Austan Goolsbee, who left open the possibility of a rate hike. Federal Reserve Chairman Jerome Powell has signaled that interest rates could remain high for longer. March PCE data is due out next week, and given the Fed’s comments, it may be higher than expected.

First quarter GDP will also be released, which will likely reveal the continued strength of the US economy. If the economy continues to show resilience, a rate cut may not occur this year. The stock market has now priced in at least one rate cut in 2024, compared to the four rate cuts expected at the start of the year.

In a “higher is longer” interest rate environment, here are two events that could intensify selling pressure over the weekend:

• Geopolitical tensions in the Middle East are rising, but for the time being they are easing.
• Option expiration dates mean high trading volume.

No one wants to open a new position on Friday. This is especially true after a volatile trading week. Anything can happen on the weekend, and traders want to be patient and wait to see if the stock market falls further before jumping in.

wider market

You’ve probably heard the saying, “The market goes up stairs and the elevator goes down.” You can see this happening on charts of broader indices.

S&P 500

The S&P 500 ($SPX) closed below 5,000, a fairly psychological level. On the daily chart, the index has broken below the 50-day simple moving average (SMA) and is now approaching the 100-day SMA. It has been on an elevator ride over the past six days and as the chart shows, there could be more selling next week.

Figure 1. Daily chart of the S&P 500. The elevator went down because the S&P 500 fell below its 50-day SMA. The index is now approaching the 100-day SMA, which could be the next support level. Will it fall below support?Chart source: StockCharts.com. For educational purposes.

On the weekly chart, the S&P 500 is above its 50-week SMA, but it has been down for three consecutive weeks, which doesn’t paint a good picture. As of now, it looks like the index will fall further.

Dow Jones Industrial Average

After the most recent sell-off, the Dow Jones Industrial Average ($INDU) is trading near support levels (December 2023 high). Looking at the daily chart below, we can see that despite the index closing higher on Friday, it has hit resistance at its 100-day SMA.

Figure 2. Dow Jones Industrial Average ($INDU) daily chart. After the elevator goes down, $INDU appears to be reaching support levels and attempting a reversal, which is a positive sign.Chart source: StockCharts.com. For educational purposes.

Nasdaq Composite

The tech sector took a huge hit this week. NVIDIA (NVDA) fell more than 9% on Friday. Tesla (TSLA) stock price continued to decline, hitting a new 52-week low. Advanced Micro Devices (AMD) fell more than 5%.

Super Micro Computers (SMCI), which has been in the top five of the StockCharts Technical Rank (SCTR) for several months, is down more than 23%. The sell-off occurred because the company decided not to announce earnings in advance as it had done in the past.

Investors appear to be taking profits in technology stocks. As a result of the massive selling in technology stocks, the Nasdaq Composite is trading below its 100-day SMA (see chart below).

Figure 3. Nasdaq Composite Index daily chart. The Nasdaq Composite may fall below its 100-day SMA and then towards its 200-day SMA. The little wick at the bottom is slightly encouraging, but next week is another week.Chart source: StockCharts.com. For educational purposes.

Whenever there is a big sell-off like this week, investors question whether the market has bottomed and whether now is the ideal time to initiate a long position. There was a bit of that on Friday, but every time the market bounced, it came under pressure from sellers and fizzled out. If technicals are still at a low level, it may be advisable to adopt a “watch” approach before entering a long position.

No one knows what will happen next week, but tech companies will start reporting earnings, which could push the stock market higher.

some bright spots

The financial sector is showing signs of a turnaround after experiencing a similar plunge as the broader indices. The daily chart of the Financial Select Sector SPDR (XLF) below shows a possible reversal, but a series of higher highs and higher lows are needed before an uptrend is established. XLF must be stopped above.

Figure 4. Daily chart of the Financial Select Sector SPDR ETF (XLF). It appears that XLF will have to overcome resistance at the 50-day moving average before the trend reverses.Chart source: StockCharts.com. For educational purposes.

Shares of Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) all rose on Friday. WFC stock price reached an all-time high. Prices of precious metals such as gold and silver are trading higher. As geopolitical tensions rise, investors are turning to safe-haven investments.

It was interesting to see the CBOE Volatility Index ($VIX) hit a high of 21.36, close to the 23 level recorded in October last year. However, it was withdrawn and closed at 18:71. Volatility may have increased due to option expiration.

If you look at the Nasdaq Composite Index chart, you can see that this is consistent with the October sell-off in technology stocks. Will the broader market follow a similar path when tech earnings kick in next week? We’ll have to wait.

conclusion

The stock market action has not been great this week and while it is tempting to look for bargains in stocks, it is best to be patient. This is a good time to analyze charts and observe market movements instead of chasing positions. This can be of great help in understanding the irrational nature of the stock market.

weekend wrap up

• The S&P 500 closed down 0.88% at 4,967.23, while the Dow Jones Industrial Average rose 0.56% to 37,986. The Nasdaq Composite Index fell 2.05% to 15,282.01.
• $VIX up 3.94% from 18.71
• Best performing sector this week: Utilities
• Worst performing sector this week: Technology
• Top 5 Large Cap Stocks SCTR Stocks: MicroStrategy Inc. (MSTR); Coinbase Global Inc. (COIN); Super Microcomputer (SMCI); Vistra Energy Corporation (VST); Vertiv Holdings (VRT)

On the radar next week

• US GDP in the first quarter of 2024
• March Core PCE
• March durable goods order
• Earnings season is in full swing with reports from Alphabet (GOOGL), Metaplatform (META), Tesla (TSLA), Microsoft (MSFT), Intel (INTC), and Visa (V).

disclaimer: This blog is for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.