Dow Jones, Bank Earnings Drag Market Lower

During the long weekend when the stock market was closed for Martin Luther King Jr. Day, investors should be aware that the key level to watch for on the S&P 500 futures is the psychological level of 4,000. Long weekends like this can result in lower trading volume, making the market more vulnerable to sudden movements. While the market may experience sideways action and theta decay, it is important to keep an eye on this key level as it can be affected by any drastic moves made in the market.

Critical level holds over long weekend

Despite the lower trading volume during the long weekend, the 4,000 level on the S&P 500 futures was tested multiple times. Each time the level was approached, the support held, and the market remained above it. This price action is noteworthy as it indicates who is currently in control of the market.

Buying pressure quickly lifted the market as soon as the market opened. However, the early price action provided clues about which sector is driving the market. With bank earnings already underway and continuing this week, the Dow Jones has struggled and lagged behind other indexes. Meanwhile, the Nasdaq has recently displayed strong performance, and this trend continued in today’s session.

After the initial drive at the opening bell, the market attempted to retest the highs from Friday. However, the market encountered resistance and managed to push through it. Following the resistance, there was a sharp decline, but it was not enough to break the key level of 4,000 on the S&P 500 futures.

For the remainder of the trading session, price action was contained between 4,000 and the Volume Weighted Average Price (VWAP) of around 4,016. 

Bull case moving forward

As a trader, it is essential to have a plan for different market scenarios. For an upward continuation, some factors that can confirm this bias include the S&P 500 futures staying above 4,000, the Technology sector continuing to lead, and the Dow Jones reversing its current trend. The 4,000 level serves as a critical indicator and should be closely monitored in future price action. The Nasdaq has shown significant strength, for the rally to continue, technology stocks will need to maintain their strength and drive the market forward. Lastly, with bank earnings, the Dow has been pulling the market down, for another significant move to the upside, a positive change in that sector will be crucial.

Bear case moving forward

For any strategy for a potential market downturn, it starts with the 4,000 level on the S&P 500 futures. If this level is broken, it could indicate a change in market strength and control. Another factor to consider for a downside scenario is that the technology sector may have reached its limit and could be showing signs of exhaustion. If this occurs, it may require more buying to keep the market moving higher, especially with the Dow Jones struggling. Lastly, even though the market recovered from an early sell-off, the rest of the day saw the market mostly trading below the Volume Weighted Average Price (VWAP). This type of price action suggests that although the market recovered, the overall trend was still bearish while it was trading sideways.

Mixed indexes leave the market flat.

The Nasdaq finished the session green, whereas the S&P 500 and Dow Jones futures were negative to close the session. The S&P 500 closed down 0.20%, losing 8 points, while the Nasdaq closed up 0.18%, a decrease of 22 points. The Dow Jones followed the S&P, closing down 1.18%, declining 408 points.