Key Levels To Watch For A Break Higher In Equities

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Includes: CRF, DDM, DIA, DOG, DVYL, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, IYY, JHML, JKD, OTPIX, PPLC, PPSC, PSQ, QID-OLD, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWL, RWM, RYARX, RYRSX, SBUS, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPSM, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU-OLD, SPXV, SPY, SPYD, SPYG, SPYV, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USSD, USWD, UWM, VFINX, VOO, VTWO, VV
by: Chris B Murphy

Summary

Q2 GDP will be a key driver for the equity markets especially following the weak Durable Goods Orders on Monday.

The Dow Jones is currently in a 5.25% move higher that if completes would translate to the Dow hitting 21,700 to 21,800.

Both momentum indicators and price action lean towards the probability of a correction lower following a touch of the 21,800 level.

As the market trends higher, it will be important to watch for any changes in the economic fundamentals as they will likely drive momentum in the markets and also drive any breakouts or corrections on the charts.

If you follow my articles on SeekingAlpha.com, you know that most of my articles center around a risk management theme with a macro view of the markets and how those macro events may drive price action.

Here are a few of the economic fundamentals that could lead to breaks higher or lower in equities. Those investors who are long equities via the SPDR Dow Jones Industrial Average ETF (DIA) and the S&P 500 via the SPDR S&P 500 Trust ETF (SPY) will likely be impacted by the economic drivers outlined in this article.

  • The Fed signaled their desire to begin reductions of their $4.5T balance sheet. Although it will likely be a gradual unwind, any hawkish Fedspeak may either spook the markets or possibly drive equities higher on positive comments on the economy.
  • The 10-year Treasury yield has driven the bank rally, and the subsequent correction and will likely take its cues from expectations of growth and inflation in the U.S. If yields are rising, optimism is likely rising as well and should bolster equities.
  • Gross Domestic Product or GDP growth for Q2 should be a key indicator. Although likely to be better Q1, the disappointing Durable Goods Orders this week may be a leading indicator that Q2 GDP may disappoint as well.

Durable Goods Orders disappointed as it fell -1.1% in May.


If businesses are holding off long-term spending, GDP growth may struggle to rise much above 2%. We've had three consecutive quarters of declining GDP growth and only one-quarter above 3% since 2014. For equities to justify their valuations, we'll need to see stronger GDP growth in the second half of this year.

GDP Growth

How the fundamentals could move the Dow:

  • Below is the daily chart for the Dow. We can see equities moved higher in and around the bullish channel (red lines).
  • Typically, not always, sell and buy orders are placed by traders around the trendlines and also at price levels that correspond to equal waves.
  • We can see below that selloffs occurred as the equal waves completed.
  • Currently, we're in a possible 5.25% move higher. If hedge fund managers and traders place stops or take-profit orders at the completion of the current 5.25% wave, 21,700 to 21,800 is likely to be serious resistance.
  • The fact that the top of the channel also comes in at 21,800 gives us a confirming indicator that sell orders might be numerous in that region.
  • The possible placement of sell orders at the top of the channel doesn't necessarily mean the bull move is done.
  • However, the key takeaway from the chart is that a probability of a correction increases the closer we get to the top of the channel. As a result, the Dow might be pressured lower and might eventually come back down to the bottom of the channel.

Dow Jones Chart Confirming the fundamentals and the charts with momentum:

  • The MACD indicator which measures momentum remains in bullish territory.
  • However, as the Dow has put up new highs closer to the top of the channel, the MACD has put up lower highs (divergence). This divergence is a sign that a possible correction lower may materialize in the coming weeks.

Key levels to watch and where buy & sell orders might be located:

  • The Dow is currently bouncing off a small retracement of about 200 points.
  • A break above 21,550 (buy orders likely above this level) might propel the Dow to 21,700 to 21,800. Typically the breakout travels the length of the pullback or in this case, 200 points.
  • A break lower below 21,300 would likely send the Dow to the bottom of the channel (bottom red line) or 200 points to the 21,100 level.
  • As mentioned earlier, the fundamentals whether bullish or bearish for equities will be behind any of the moves outlined in the charts. The charts do not drive price action, rather the fundamentals behind a move are necessary for a sustained rise or fall in the Dow. Any breakout or move without the fundamentals pushing behind it will likely fail to last very long.
  • For traders looking to go long: If fundamentals favor equities following a pullback, look for traders to use the bottom trendline as an attractive entry point to play bounces higher.
  • Risk management note: On any break to the downside or bounce off the bottom of the channel, please re-evaluate the fundamentals to determine if they align with a bounce higher in the S&P before jumping back in.

Good luck.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In full disclosure, this article is not a comprehensive analysis of the equity markets. I am not a financial advisor, and the analysis in this article represents only a few of the many fundamental and economic factors that go into driving the markets. Before making any investment decision, please contact your financial advisor. And of course, any analysis of past performance does not guarantee future results.