Staying Bearish on Stocks: Best Trading Opportunities

(MENAFN – DailyFX)

It’s been a tough year for equities, but I don’t think the bottom is just yet. Maybe something like that happens in the third quarter, kind of a bottom-out effect, but I don’t actually predict where we are at now.

The Fed has changed and at this point it seems pretty obvious. What keeps me on the bearish side of equities is that there is still so much of a “buy on the downside” mentality in global markets. And while the Fed has already made progress toward tighter policy, we still haven’t seen a meaningful response with inflation, which means the Fed will have to keep rising until something starts to go down. to change. And at this point, there’s just a lack of evidence to suggest it might be close and, if so, there’s evidence pointing the other way with yet-to-be-shown impact of the China lockdown and war underway in Ukraine.

The effects of higher rates are also likely to have a greater impact on emerging markets, which could, in turn, further impact US equities which like to sell products and derive income from these economies. Combine that with an expected pinch in Europe as inflation rises and there’s not much optimism on the horizon for equities and at this point equities are still quite overvalued relative to historical standards.

I will maintain my bearish stance on US equities in Q3, looking specifically at the Nasdaq and S&P 500 . But, even the Dow brings downside potential in the third quarter as prices have, so far, been tested but not broken below, a critical set of supports straddling the psychological 30,000 level.

Dow Jones

There is a major support point on the Dow Jones chart going from one Fibonacci level at 29671 to another Fibonacci level at 30,109. Between these two we have the psychological level of 30,000, it is therefore acts as a big support lot on the Dow Jones chart.

And, just like at the start of 2021, this spot has so far helped cauterize lows as bulls have prompted a rebound. This has so far led to a slight rebound and this rebound may continue for some time, but there is resistance above 31,393 and then another confluent area around 32,500 which could prove problematic for the bears.

I think the support area around 30k might give way in Q3. The next confluent support zone on my chart is around 27,459, which is just over 10% off the current price, at the time of this writing.

Dow Jones Weekly Chart (2018-Present)

Chart created with TradingView, prepared by James Stanley


For my best trade in Q2, one of the big sticking points for the S&P 500 was a confluent support zone that had already been tested in Q1 but, by the end of the quarter, had yet to break. This confluent zone was between two Fibonacci levels at 4186 and 4211. It finally gave way in April before showing up as a test of resistance in late May.

There was another confluence zone between two Fibonacci levels a bit lower which ranged from 3802 to 3830. This zone came in as support in mid-May and broke through in early June. As of this writing, it comes back as resistance.

At this point, the trend seems pretty clear and lower prices seem likely. The biggest question is timing as I write this with just over a week to go until the second trimester ends. But, this rebound may last a bit longer as there is still an open gap above the 3900 level.

For the third quarter, I want the price to drop towards 3500, which is about 50% of the pandemic move. This would be a loss of around 7.5% from the current price and given the context, this seems a reasonable support target. There is another more important area though, which is down around 3200. There are two Fibonacci levels straddling this price and that is at around -14.3%. That would be a little aggressive for a move in a single quarter, but I’m not going to rule it out – instead I’m just going to mark this as a support target which I think can come into play by the end of the year.

S&P 500 weekly price chart (2018 to present)

Chart created with TradingView, prepared by James Stanley


The Nasdaq continues to show a more developed downtrend and I believe this will remain the case through the third quarter. While the S&P 500 is currently finding resistance at the 38.2% Fibonacci retracement of the pandemic move, the Nasdaq is finding resistance at the 50% mark of its own move around the same time frame. And while the S&P 500 is down 24.32%, the Nasdaq is down as much as 34% from its peak set last November.

And that makes sense: with rates rising, the riskier, tech-focused index has become more vulnerable. And as rates continue to climb, corporate funding will become more difficult and this may continue to negatively impact the higher beta issues that populate the Nasdaq.

The next point of support on my longer-term Nasdaq chart is in the 10,500-10,750 area, the first of which is the 61.8% retracement of the pandemic move. That’s just under 10% from current prices and seems like a reasonable support target for Q3. If the move continues to build, which is possible given the pilots, a 10k impression cannot be ruled out of the equation.

Nasdaq 100 weekly chart (June 2018 – present)

Chart created with TradingView, prepared by James Stanley


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Garland K. Long