Resistance Prevailed | IVolatility.com

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Ready for Earnings

January 23, 2023

After a disappointing retails sales report last Wednesday, the S&P 500 Index again closed back below its 200-Day Moving Average, followed by a “gap lower” close on Thursday. Friday, the picture changed quickly as money rotated out of bonds back to equities ahead of this week's earnings reports that include many of the big cap tech favorites like Microsoft (MSFT) after the close Tuesday, and Tesla (TSLA) after the close Wednesday.

Since prices may already reflect reduced estimates, pay close attention to the reaction of those that either beat or miss consensus estimates and forward guidance. In general, odds for price reversals increase after large price advances or declines going into the report.

S&P 500 Index (SPX) 3972.61 slid 26.48 points, or -.66%, with all the gains for the week coming from Friday’s advance of 73.76 points, closing just above the 200-day Moving Average at 3968.87. This marks the sixth attempt to close above this downward sloping resistance line after the “weed whacker” (see Earnings Challenge) again ended the fifth attempt following the retail sales shortfall last Wednesday. Here’s the line of close chart:

Ivolatility spot price chart

The January 10 breakout above the trading range that began on December 16 produced a measuring objective (MO) at 4016 (determined by adding the height of the range to the breakout) as shown above. After declining last Wednesday and Thursday, it looked as if it would drop back into the range.

Then on Friday it opened slightly higher, closed the gap between Wednesday and Thursday and pushed higher when the iShares 20+Year Treasury Bond ETF (TLT) opened “gap lower” before closing at 106.20, -1.75 points (or 1.62% lower) as it met resistance from the 200-day Moving Average. This suggests rotation out of bonds and into equities.

Continuing breadth improvement provides more encouragement for the longs.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, again advanced every day last week - adding another 230.68 points to end at 615.46, delighting the bulls.

Implied Volatility

SPX 30-day options implied volatility index (IVX) advanced 1.83 points or 11.18% ending at 18.20%. Readings under 20% add support for the bulls. For reference, since it eventually reverts to the mean the 52-week chart shows it at 22.46%.

Ivolatility spot price chart

Summing Up

Although all earnings reports have the potential to determine the direction of the equity market, this week's reporting carries the added burden of five failed attempts for the S&P 500 Index to close convincingly above the downward sloping 200-day Moving Average that currently defines the trend. Some part of last Friday's gain can be attributed to rotation out of bonds preparing for this week's earnings reports.

Lowered estimates help companies beat the numbers, but those that fail will likely see their stock prices decline unless offset by positive credible forward guidance.

Options implied volatility and market breath both reflect positive bias.

"... the markets are a game played in a third dimension of the emotions and a fourth dimension of dreams." - Barton Biggs, veteran Morgan Stanley market strategist

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