Technical Conditions Increase the Risk of a Negative Reaction to Important News
Amazon earnings and the Fed rate decision are coming up, and market conditions are not favorable.
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The S&P 500 and key indexes are approaching significant technical overhead as market participants await significant news. The news flow starts on Tuesday night with earnings from Amazon AMZN and continues on Wednesday with the Federal Open Market Committee's interest-rate policy decision. Numerous other earnings reports and important economic reports are also to be released.
The alignment of news with key technical levels is very important. The reaction to the news is largely determined by technical conditions rather than the news itself. Market conditions tend to drive the reaction to news rather than the other way around.
The S&P 500 is bouncing after a significant technical breakdown and a poor reaction to earnings reports, including those from Meta META, but the 50-day simple moving average is hovering at 5126 and is the natural place for the market to pull back.
One troubling warning sign is that the very good earnings from Microsoft MSFT and Alphabet (GOOGL) haven't created strong momentum for the Nasdaq 100 QQQ. Microsoft completely filled its positive earnings gap at one point on Monday, and Alphabet has been steadily lower after its big move on Friday morning following its report.
The biggest market positive recently has been strong breadth, which caused some rotational action into smaller stocks. The Russell 2000 IWM has shown good relative strength, but it is starting to run into some overhead resistance as well.
The reaction to Amazon's earnings will be very important Tuesday night, but the fate of the market is more closely tied to the Fed's decision on Wednesday. If Jerome Powell acknowledges the fact that there may not be any rate cuts in 2024, it is likely to trigger more pressure, even though it is not a particularly surprising view.
Technical conditions are very challenging, which means that there is a greater danger of a negative reaction to the news.
At the time of publication, Rev Shark was long AMZN.
