On Tuesday, the retail earnings report came in -0.8% below expectations, amid recent highs from two of the major indices. This caused the market to shrink to the gap after a continuous sale throughout the day. However, the market did not close at the lows of the day, which could be considered as a buying opportunity for tomorrow.
While that could be the case, there are specific price levels the market needs if we want to expect a rebound on Wednesday. We should also be cautious, as there are new underlying fears caused by the retail profit report.
How the investor worries about the retail report
The reduction in retail sales can be attributed not only to supply chain disruptions, but to rising inflation, as the cost of goods and the scarcity of them have put additional stress on the economic growth. As a result of the pandemic, this issue, along with inflation, had to be transitory in the eyes of the Fed.
In addition, the Fed thought that COVID-19 cases would continue to decline as the vaccinated population grew. This means they could maintain their targets of phasing out support programs and raising interest rates by 2022-2023. However, now that the delta variant is extending the pandemic timeline, the market could be looking for signs of continued support or recognition to which the Fed’s plan should adapt. That said, this issue will become clearer as more time and reports are published.
On the other hand, short-term market action is more volatile and can fluctuate based on more than the long-term outlook.
Should we expect a market rebound?
Only if the major indices respect specific price levels.
This is especially true for the Russell 2000 Reduced Capitalization Index (IWM), which has been limited for most of the year. Currently, IWM has retired from the lower end of its range near the 200-day moving average. The large bottom wick of Tuesday’s candle shows that there is support in this area. So if IWM holds above the 200-DMA at $ 213.19, we can expect dip buyers to look for an entry.
The rest of the indices, including the S&P 500 (SPY), the Dow Jones (DIA) and the Nasdaq 100 (QQQ), do not have such a clear level of support. Their trading factor is that they did not confirm a superior chart pattern with a close below Monday’s low. Therefore, if the market makes a bonus, they should stay above Monday’s low, as seen in the chart above. However, if Monday’s lows can’t be maintained, be careful, as shoppers don’t like to be caught with a falling knife.
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- S&P 500 (SPY): Closed at 10-DMA at 443.39.
- Russell 2000 (IWM): Admit the 200-DMA at 213.19.
- Dow (DIA): 351 support.
- Nasdaq (QQQ): 362 support.
- KRE (regional banks): 64.86 fundamental.
- SMH (semiconductors): It is necessary to recover more than 257.06, the 50-DMA.
- IYT (transport): Resistance 257.68.
- IBB (Biotechnology): Support area the 50-DMA at 164.29.
- XRT (retail): 92.35 next support. 98 resistance.
Deputy Director of Research and Education in Trading