In this article:

• Indexes fall below key target levels
• Economic data, Fed meeting fuel uncertainty
• Curve ball hits S&P 500 with pullback

Cautious optimism of last week disintegrated into swift selling and a sharp pullback Monday in the stock market.

The sharp gap down left traders wondering, “What’s next?,” as a variety of events are set to play out this week.

Can any signals from last week hold as this market sits on the precipice of pushing back into bear territory?

Bull run falls apart in stock market losses

After hinting at a steady run higher for weeks, the three major indexes didn’t fare well last week and the opening session this week was even gloomier for bullish traders.

The weeks-long push higher allowed the Nasdaq to shed its bear market label after rising more than 20% above its mid-June low. A continuation of this push higher and above its 200-day simple moving average (SMA) could have ended an overall downtrend.

On Friday the Nasdaq was 5.5% below the 200-day SMA. That fell apart with the Monday slide.

The S&P 500 was showing bullish signs last week as well, rallying to its 200-day SMA where it found resistance. Bulls were looking for a move above this key moving average and into the 4,400 range to strengthen the possibility of a continuation rally. The bulls were chomping at the bit that such a move could send the index toward the highs in March around the 4,800 level.

That began to fall apart with the S&P 500 closing the week with a loss of 1.2% and sending the index below its 10-day SMA. Combined with losses to start this week and the index is well below the recently surpassed resistance area of 4,170.

The result was stocks trading much lower than anticipated to start this week.

In the market today, the Dow closed at 33,063.61 points to lose 1.91% (selling off by 643.13 points on the day). The Nasdaq dropped to 12,381.57 points for a 2.55% tumble while the S&P 500 crumbled 2.14% to 4,137.99 points.

Fed meeting, big tech fuel uncertainty

The losses so far have been fueled by missed expectations in economic and earnings data last week along with uncertainty over the upcoming Federal Reserve Bank of Kansas City Economic Policy Symposium in Jackson Hole, Wyo.

This follows the release of FOMC meeting minutes last week. Notes showed clear resolve for the Federal Reserve (Fed) staying with its plan to further raise benchmark interest rates as needed to combat inflation, even if it negatively affects the economy. (The next regular Fed meeting is set for Sept. 20-21.)

Rising interest rates do not support growth stocks as it reduces the value of future earnings. This gives insight into price action of key technology stocks last week.

Tesla (TSLA), Amazon (AMZN) and Microsoft (MSFT) pulled back from potential moves above the 200-day SMA while Alphabet (GOOGL), Amazon (AMZN), and Meta Platforms (META) lost an average of 4.5%. 

These technology leaders – all weighted heavily across the three major indexes – act as a warning flag for the appetite of market participants for growth stocks. One week of lagging performance may not steer the market, but this technology-laden price action gives insight into the thought process of market participants. Expectations are that these big-ticker names will need to show more resilience to spur confidence in the market trending higher.

Market participant sentiment is a driving force in price action and uncertainty has spiked again.

The Chicago Board Of Exchange (CBOE) Volatility Index (VIX) spiked more than 15% on Monday, sending this “fear index” into overdrive. The VIX closed at 24.04. 

The VIX anticipates market volatility over the next 30 days. A level above 20 is considered high volatility – more fear in the market – and stocks tend to trend lower. The sudden spike in VIX is a caution for traders, and any unexpected negative market influence could cause an explosion higher.

Consumer interests, and the companies supporting them, can be seen as intertwined in the stock market and affecting sentiment as well.

As an example, Cineworld Group PLC (CINE), parent company of Regal Cinemas, has publicly warned of possible bankruptcy. CINE closed down by 21.36% Monday at $3.20.

The announcement didn’t just send CINE stock falling, it also affected AMC Entertainment Holdings, Inc. (AMC) which fell 41.95% on Monday. This followed a 26% drop last week. The outlook for big cinema is bleak through the fall with limited release of box office big pictures.

Another key insight from last week, and compounded in the stock market today, was in the discretionary sector.

This high-growth area rallied up to its 200-day moving average last week where it found resistance and pulled back. Heavyweight stock AMZN exhibited very similar price action.

The AMZN move last week was similar to its late March period where the stock traded above its 200-day SMA for a couple of days before a move below this moving average. This price action preceded a lengthy downtrend in AMZN and many growth stocks. AMZN closed at $133.22 on Monday, down 3.62%.

These are key areas of the market to keep an eye on in the near term.

What to watch this week in stock market

In addition to the Fed meeting at the end of the week, earnings and a stock split are at the forefront of market movement.

Companies that could influence market movement such as Nvidia (NVDA), Peloton (PTON), Dollar General (DG), Salesforce (CRM), Intuit (INTU), and Zoom (ZM) are due to report their quarterly results.

The TSLA 3-for-1 stock split goes into effect on Thursday.

Here is a quick look at more events on tap:

• Tuesday – Euro Area Purchasing Managers Index (PMI) which measures direction of manufacturing economic trends; U.S. New Home Sales;
• Wednesday – Numbers for U.S. durable goods and U.S. pending home sales
• Thursday – U.S. gross domestic product (GDP) numbers; start of symposium for Fed in  Jackson Hole
• Friday – Numbers for “core” personal consumption expenditures (PCE) which excludes food and energy prices; continued Fed meeting in Jackson Hole with Chairman Jerome Powell speaking.

S&P 500 crossing ‘line in the sand?’

A curve ball that traders may not have seen happened within the S&P 500.

Internal signals showed last week that more than 90% of stocks in the index pushed above the 50-day SMA.

“Historically this has been a line in the sand that has marked major lows in the market,” said Sam Shames, Vice President of Options at Simpler Trading. He encouraged traders to keep an open mind about what might happen and take this market day-by-day.

“The ‘tell’ will be in how the SPY handles pullbacks to support, but the implications of the periphery imply that it is very possible that support will not hold as there is no leadership in tech,” Sam shared.

Another curve ball ahead may lie in the inverted yield curve which may signal rough waters in the market ahead. The inverted yield curve is the relationship between the 10-year and two-year treasury bonds.

There are passionate arguments for and against the inverted yield curve signaling a recession.  Simpler’s traders are watching this as economic data, earnings, and Fed events unfold this week.

Consider all influences hitting market this week

After the swift and significant pullback Monday, caution is at the heart of any trading plans for Simpler’s traders this week.

The inability last week of price action to move back above the 200-day SMA is similar to the Nasdaq in late March. This coincided with the Fed announcing intent to raise interest rates which in turn, pushed the markets lower.

What happens if the Fed this week again announces higher interest rates ahead?

Traders will have to consider this question and many accompanying market influences to navigate price action through the week.