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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Friday, July 24, 2020

1. Troubling chart views create key moment in coming week

2. Global investment trends continue their shifts

3. Earnings season hits a high point

Market Moves

Earnings season will have hit its peak by next Friday. Considering the way charts have shaped up in the last 48 hours, it appears that next week's news will be highly influential and pivotal. By that time, investors will have the bulk of the information they are looking for to decide how to position themselves going forward. Portfolio managers will then apply the finishing touches to their third quarter investing strategies. Individual chart watchers need to know what to watch for.

The chart below takes a close look at the reaction of State Street's S&P 500 index ETF (SPY) and analyzes how the overhead resistance area has shaped the trend. This colorful chart based on Fibonacci time and price lines is much simpler to read than it might seem: each slope the price action breaks through delivers a more bearish forecast. Considering the way the price hit resistance back in early June, and has moved in a volatile sideways trend since then, today's move into the yellow wedge (below its recent trend line) is a disappointing signal.

Over 188 companies (about 3 in every 8) of the S&P 500 components will report earnings next week. If investors are unwilling to buy stocks with SPY above the lower edge of the resistance zone, the prospects are dim for the remaining weeks in the third quarter.

Global Investment Trends Continue Their Shifts
The chart below looks at two prominent currency pairs (EUR/USD and AUD/JPY) and the two asset indexes they are most closely correlated with right now. The euro, as of the last month or so, seems to be moving in a highly correlated way with the price of gold when compared to State Street's gold index fund (GLD). Meanwhile the Aussie Dollar and its pairing with the Japanese Yen has continued its historical correlation with the Nasdaq 100, as tracked by Invesco's index fund (QQQ).

The importance of these correlations is that these patterns confirm what chart watchers are seeing elsewhere: money is coming out of tech stocks and the U.S. industries they drive, and moving instead towards safer havens. Indeed, the lower panel shows a price trend that is precariously close to violating its trend line. This adds all the more importance to the outcome of the upcoming earnings drama mentioned previously.

Read more:

Alphabet Earnings: What to Look For

Apple Earnings: What to Look For

Amazon Earnings: What to Look For

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Earnings Season Hits a High Point

Though only 15 companies out of the Nasdaq 100 will report in the coming week, this grouping is perhaps the most influential. The combined market capitalization of these companies makes up more than 40 percent of the index. If we could net out what these companies will say ahead of time, we'd have an excellent way of forecasting what will happen after next week is over.

Since that is impossible, we turn to technical analysis tools to help us devise probable scenarios. The chart below, as an example, uses a 10-day, 1.4 multiplier Keltner Channel study to help identify the range of price movement that is typically traversed over a 4-day period of watching QQQ shares. The high (green dashed line) and low (red dashed line) points in the price range, based on today's close, give an indication of which way investors have tilted their expectations. If in the last hour of trading next Friday afternoon, the price of QQQ is trading outside of those two lines, then investors will have tipped their hand on which way they expect the market to trend.

The good news from today is that if the market were going to drop precipitously, then investors would have likely sold it down hard today. Since that didn't happen, there is still hope for a rebound of some kind.

The Bottom Line

Earnings season will be heavily influenced by the coming week. That is important because this week's price action makes the markets appear vulnerable to a change in trend. The good news is that the markets didn't fall precipitously today and that the flurry of earnings reports may yet influence a positive price trend.