The stock market had a crazy good week. A way to make sense of it all.

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Traders prefer a volatile market, and they got one in 2022. Stocks have fallen, rebounded and fallen again, driven by ever-changing expectations for interest rates and inflation, changing probabilities recession and the outlook for corporate earnings. Pretty much the only thing that was reliable was the technique.

Yes, techniques. Last week’s rally lifted the


Dow Jones Industrial Average

2.7%, the


Nasdaq Compound

4.1%, and the


S&P500

index 3.6%. This is after all three posted declines of at least 3% in the previous week, their third consecutive week of losses.

What stands out is where last week’s rally began, when the S&P 500 hit 3900 on Tuesday. This is not only a big round number, but also equal to the 61.8% Fibonacci retracement level from the June lows (i.e. 61.8% of the way from the market low and its previous peak). The fact that the index even needed to rebound was because it fell 9% from its 200-day moving average near 4300, where stocks had come to a halt after rebounding 17% from from their mid-June low just above 3600. The oft-maligned charts fit like a glove.

So where to go for the S&P 500? Many technical analysts consider a trading range of 3900 to 4300 the most likely in the short term. A break below 3900 would put 3800 as the next level of support and then the June low of 3636 would come into play. A rise above 4300, however, could signal further gains to come and a change in tone. of the market, writes Jason Hunter, technical strategist at JP Morgan.

That’s a big if. Keith Lerner, Co-Chief Investment Officer of Truist Advisory Services and Certified Market Technician, expects continued stabilization in the very near term, given the scale of previous weeks’ declines, depressed sentiment and recent selling off. have left the portfolio. managers are interested in stocks.

But over the next few months, he recommends trimming holdings whenever the S&P 500 approaches its resistance level of 4,300, still near the index’s 200-day moving average. This is also where the S&P 500 would trade at 18 times price/earnings, which has been the peak in recent months.

“I think it’s somewhat optimistic to say that we’ll be going back there soon,” says Lerner. “It’s a very solid cap right now, given the earnings uncertainty you have.”

Since mid-June, analyst estimates for S&P 500 third-quarter earnings have fallen 5.5%, according to Credit Suisse data, despite a better-than-expected second-quarter earnings season. Estimates for 2023 have held up better, down 3.7% since mid-June, but there is reason to believe they will fall further. The Federal Reserve’s huge interest rate hikes in June, July and September will begin to trickle down to the real economy in the coming quarters, a recession in the United States remains a possibility, and economic weakness in Europe and China will hurt multinational profits.

Faced with all the uncertainty in the outlook, analysts may not update their forecasts for 2023 just yet, focusing instead on the here and now of the third quarter. If these forecasts were to drop further, the top of the S&P 500 trading range could also decline.

For now, however, the technical aspects will likely continue to dominate. The next major catalyst for the market will land on Tuesday morning, with the August Consumer Price Index release. A tepid pace of inflation could send stocks higher to meet resistance, while a warmer print could see them break through support.

Either way, it’s a traders market. The rest of us just invest in it.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com

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