Will the Nasdaq and S&P 500 Hold Key Support?

TL;DR

The Nasdaq and S&P 500 were sitting near pivotal trend lines and moving averages, making Federal Reserve commentary and major technology earnings important potential catalysts. The analysis expected rates to remain unchanged on July 31, while warning that doubts about a September cut or unexpectedly weak corporate guidance could trigger a deeper correction.

Transcript

so the FED is expected to make their major decision on the FED funds rate this Wednesday July 31st at 2 p.m. Eastern is the Fed going to cut are they going to keep rates the same in my opinion I feel like they're going to keep rates the same and I have some data to back that up however you must see this chart here on the NASDAQ and the S&P 500 we a... Read More

Key Insights

• The Federal Reserve was expected to leave rates unchanged on July 31, with the market assigning a 96% probability to that outcome. The analysis viewed Jerome Powell's comments about September as more consequential than the immediate rate decision itself.
• September was fully priced by the market as the likely date of the first rate cut, according to the probability data shown. The market also expected three cuts during the year, specifically in September, November, and December.
• Inflation had fallen to 3% year over year, its lowest reading since July 2023, while the monthly figure was minus 0.1%. The analysis argued that readings near 2.5% or lower could support a September rate cut.
• The Nasdaq was near its first 10% correction of the year after technology leaders such as Nvidia, AMD, Broadcom, Apple, Microsoft, and Meta had reached all-time highs. The pullback was therefore characterized as unsurprising after substantial gains.
• The Nasdaq was testing a major bull-market trend line and its 100-day moving average. Previous tests of that moving average occurred in April and November 2023, making the current area a pivotal technical support zone in the analysis.
• The market maker model describes advances as sequences of higher highs and higher lows, followed by reversals producing lower highs and lower lows. Sell models often retrace toward the first consolidation that initiated the preceding buy model.
• The S&P 500 had fallen about 5% from its highs, roughly half the Nasdaq's decline, reflecting its greater diversification. It was near the 50-day moving average, while a decline to the 100-day average would represent about a 6.5% pullback.
• August had finished positive in every election year included in the 32-year SPY seasonality dataset shown. The analysis treated that pattern as supportive of a rebound, provided Federal Reserve commentary and major corporate earnings did not create negative surprises.

Questions & Answers

Q: Will the Federal Reserve cut rates on July 31?

The analysis considered a July 31 rate cut unlikely because the market assigned a 96% probability to rates remaining unchanged. The more important issue was expected to be Jerome Powell's commentary at 2:30 p.m. Eastern, particularly whether he supported or challenged the market's expectation that the first rate cut would arrive in September.

Q: When could the Federal Reserve make its first rate cut?

September was presented as the market's expected timing for the first rate cut, with the probability data shown pricing that outcome at 100%. The market also expected three cuts during the year, in September, November, and December. However, the analysis warned that the first reduction could be delayed until November if inflation did not continue moving lower.

Q: What inflation readings could support a September rate cut?

Inflation was reported at 3% year over year, the lowest level since July 2023, while the month-over-month reading was minus 0.1%, the first negative monthly figure since January 2023. The analysis suggested that continued declines toward 2.5% or below in August and September would make a September rate cut more likely.

Q: Why was the Nasdaq at a crucial technical level?

The Nasdaq had approached a 10% correction while testing a major trend line that had remained intact since the bull market began. It was also sitting near its 100-day moving average, a level last reached in April and previously in November 2023. Losing that combined support could allow the correction to deepen.

Q: What could cause a deeper stock market correction?

A deeper correction could follow if Jerome Powell indicated that a September rate cut was unlikely, because the market had already priced that cut in fully. Disappointing earnings, unexpectedly negative corporate commentary, or weak guidance from Microsoft, Meta, Amazon, or Apple could also push the Nasdaq below its trend line and moving-average support.

Q: How does the market maker buy and sell model work?

The market maker buy model was described as an advance that produces higher highs and higher lows. After a reversal, the sell model produces lower highs and lower lows and often moves back toward the first consolidation that began the preceding buy model. During strong uptrends, prices may stop above that original consolidation, preserving the broader rising structure.

Q: Could major technology earnings move the entire market?

Major technology earnings could move the market if results or management commentary were unexpectedly poor. However, ordinary results that merely met expectations were not expected to cause a large correction. Microsoft rarely exceeded its options-implied move, Amazon did so only about half the time, and options markets overestimated Apple's earnings move 58% of the time.

Q: Why did the analysis view August seasonality positively?

The SPY seasonality data shown covered 32 years and indicated that August had been positive in every election year within that dataset. The analysis called August the best election-year month and viewed this pattern as consistent with the technical support levels. That outlook depended on Jerome Powell avoiding unexpectedly restrictive commentary and major companies avoiding serious earnings disappointments.

Summary & Key Takeaways

• The analysis expected the Federal Reserve to keep its funds rate unchanged on July 31 because the market assigned that outcome a 96% probability. September was priced for the first cut, with three cuts expected across September, November, and December, but continued inflation improvement was presented as a key condition.

• The Nasdaq had approached a 10% correction and was testing its long-running trend line and 100-day moving average. The S&P 500 had declined about 5% and was sitting near its 50-day moving average. Losing these technical supports could open the way to a deeper market correction.

• Federal Reserve communication and large technology earnings were identified as the main near-term catalysts. Ordinary results from Microsoft, Meta, Amazon, and Apple were not expected to shift the market dramatically, but poor results, troubling commentary, weak guidance, or doubts about a September rate cut could intensify selling pressure.