Rallying unrelentingly post-April lows, the major US equity indices nevertheless were only trudging higher in the last several weeks, with several potentially bearish candles on the weekly, which, however, went unconfirmed. Last week produced another. Will the bears manage to push the ajar door wider this time?
 

Small-cap bulls did a very good job of rallying the Russell 2000 to its prior highs, but now they seem stuck.

Last November, the index retreated after ticking 2466, which edged past the prior high of 2459 from November 2021. On 18 September, those highs were surpassed, tagging 2470 intraday. This momentum continued until last Monday when a fresh high of 2502 was ticked intraday, but small-cap bulls were unable to hang on to those gains. By the end of the week, the index declined 3.3 percent to 2395, well below the prior highs. Bears have an opening here.

In fact, odds of a triple top have meaningfully grown.

On 9 April, the Russell 2000 bottomed at 1733, then surging north of 44 percent over six months. A lot of buying power has been expended in the process, and it is hard for even the ardent bulls to aggressively put new money in at this technical juncture. They will be tested in the sessions ahead as to if they can defend a rising trendline from the April lows, which is where the index finished last week (Chart 1). If they succeed and the index rallies, bears are likely to aggressively show up at the prior highs (2460s).
 

The Nasdaq 100, too, closed last week right at trendline support from April (Chart 2). The tech-heavy index on the 7^th that month bottomed at 16542 and rallied more than 52 percent through last Friday’s intraday high of 25195 before unraveling to end the session down 3.5 percent to 24222. For the week, the index finished lower 2.3 percent.

Last week produced a weekly bearish engulfing candle, which needs confirmation, before tech bears can begin to high-five. In the prior 13 weeks, there have been several other potentially bearish candles – ranging from doji to spinning top to hanging man to gravestone doji – but none were confirmed in the subsequent weeks.

Hence the importance of last week’s action, as the index closed right at support. A breach opens the door to a test of horizontal support at 23600s and the 50-day at 23976 before that, with the index above the average for over five months now. In the event the trendline support in question is defended, a bull-bear tug of war is likely to then ensue at 24700s, or even before that.
 

The S&P 500, on the other hand, has not been as lucky, in that the large cap index last week closed in breach of a rising trend line from 7 April. It bottomed at 4835 on that date; last Thursday, a fresh intraday high of 6765 was recorded, before the index tumbled 2.7 percent on Friday to 6553. For the week, it was down 2.4 percent.

Like the Nasdaq 100, the S&P 500 formed a bearish engulfing candle last week. This was one of the several potentially bearish candles that developed – but went begging – over the prior 13 weeks. The difference between the two indices is that there has been a slight breach of the April trendline on the S&P 500 (Chart 3).

That said, bulls can still step up and defend horizontal support at 6530s, which also coincides with the 50-day (6530). In the event of a rally, bears can show up at 6620s, followed by 6700.
 

Bulls’ mettle is being tested even as the September-quarter reporting season gets underway in earnest this week. Several leading banks and brokers will report this week – JP Morgan (JPM), Citigroup (C), Wells Fargo (WFC) and Goldman Sachs (GS) on Tuesday and Bank of America (BAC) and Morgan Stanley (MS) on Wednesday.

Going into this, the sell-side is estimating that S&P 500 companies will bring home $66.74 in operating earnings in the calendar third quarter. This has been essentially unchanged since the end of May (Chart 4); before that, these analysts were aggressive, penciling in as high as $71.54 in July last year.

Historically, sell-side analysts have a habit of starting out optimistic and then bring out the scissors as time passes. This time around, they have stopped revising lower for several months now. This probably speaks of their conviction level hence bodes well for the season. The question is if any strength thereof in these equities will be used as an opportunity to unload.

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