Simpler Trader Catches Drop In S&P 500

2022-04-26

What happens when traders have a trading plan in place, use proven tools and strategies, and execute trades when the charts reveal setups?

TG Watkins, Director of Stocks at Simpler Trading, was able to correctly call where the S&P 500 (SPY) was going to move two weeks before it happened. TG followed his Moxie Indicator® plan as he caught the SPY falling, then saw the price of the SPY head to the previous low and bounce.

(Check out the free video, above, for insight into trading this changing market.)

TG Watkins Catches Drop In S&P 500

Since that previous low was a big area of support, this S&P 500 drop assumed a distinct place on TG’s trading radar. TG knew if the price reached that low, it would likely be quick, making the SPY oversold with its price stretched to the downside. The SPY is an exchange-traded fund (ETF) of the S&P 500.

TG followed these signals: should the SPY bounce at the double bottom, then confirmation of resistance would be needed, and that would result in the price getting rejected by the underside. 

If that price confirmed resistance, then the next move could be the failure of the double bottom, sending it on its way to a full 20% correction to near $380.

Using the Moxie Indicator® and Squeeze Pro indicator, TG anticipated the price would fall below the daily 50 simple moving average resistance, likely retest the previous lows, and hit the lower third average true range (ATR).

The big move he was watching for happened Monday. The drop developed over a period of three days and TG caught the price action as it was happening.

TG screen cap
TG Watkins tracked this drop in the S&P 500 (above).

This is a classic example of “plan your work, and work your plan” in trading. Traders are asking TG some very important questions about this move:

Q: "Why is this call in the SPY important to traders right now in this volatile market?"

TG: “Because having an idea of the path the market might take gives you the ability to plan trades around it. The thrust down was so severe that traders probably think the market is going to implode from here, but that isn't likely. 

“There will probably be a bounce before we really see an implosion. Guidance like this also helps to know when to cash in from a great trade.”

Q: "How does this help traders with trading against inflation issues?"

TG: “It doesn't help against inflation, other than we as traders can make more money than inflation takes away from our purchasing power. It's our ace up the sleeve.”

Market response to ongoing issues, earnings

This market seems to be hitting major company stocks, with the low performers getting plowed under. Traders are looking to capitalize on a market that is grappling with soaring inflation, rate hikes, and a very busy week of earnings reports.

There are a few measures traders can take to capitalize on this market environment. First, traders should understand the catalysts at play. 

The technology sector is down significantly, but recently offered up the potential for traders to short the next rally. A technology ticker that has the potential to save the day is Apple. With earnings reports this week, it remains to be seen how the market will respond to what may be an explosive blowout.

Inflation hinders economic growth and that means certain sectors of the economy are reeling from the turmoil. As technology stocks took a blow, high fliers in other sectors such as energy and metals were hit harder.

In an upside-down environment where sectors are looking for any signs of recovery, Simpler’s traders consider the news that drove stocks lower by looking at the sectors of the underlying markets.

Why have the markets shifted into a more negative mode over the near term?

A key headline that influenced the markets was the statement made by Federal Reserve Chairman Jerome Powell that it is anticipated the Federal Reserve will raise short-term interest rates in the next meeting by a half-percentage point.

In turn, interest rates for bond yields rose to the highest level in three years. 

Traders will do well to take a deep dive into which groups were most impacted by rate hikes and also earnings season – which was another primary driver of stocks that sold off the most.

Lights out for technology?

As earnings season heats up further there are a number of technology stocks due to report. Our traders anticipate volatility to remain high in these markets.

The technology-laden Nasdaq is in bear market territory again – down over 20% from the previous November. The momentum indicators also find themselves in negative territory for the Nasdaq – down 3.5% just last week.

These negative percentages can be psychologically impactful when considering the outlook for the broader markets.

Netflix (NFLX) reported mixed quarterly results for its first-quarter 2022 earnings when revenues fell short. Investors interested in the technology sector are watching the earnings releases of companies such as CACI International, Check Point Software Technologies, and Avnet on Wednesday.

Microsoft and Apple are the two heavyweights in the Technology Sector SPDR Fund (XLK) and both of them fared slightly better than the broader markets.

Tech companies may find it hard to beat earnings estimates this season due to tough year-over-year comparisons along with multiple challenges including supply chain issues, rising oil prices, and inflationary pressure. Also, the ongoing Russia-Ukraine war has been disrupting the businesses of various tech companies.

As we look at the technology sector, it actually was down 2.4%, so only a bit worse than the broader markets. But, we can see that it remains in a confirmed downtrend.

Traders keep S&P 500, defensive stocks in their sights

The daily price chart of the S&P 500 reveals insight after Friday price action was down almost 3% and dropped about 6.6% in the past month. This wiped out many potential gains.

Outside momentum indicators remain in negative territory with the Relative Strength Index (RSI) below 50 and trending lower. The stochastics indicator remains in negative territory, as well.

Traders remain cautious with a negative outlook in the near term for the S&P 500. As TG Watkins pointed out above, the S&P 500 appears to be poised to fall sharply following the selloff on Monday.

With that in mind, traders at Simpler identified areas on the two-month daily price charts areas that are relatively stronger. This showed defensive stocks to be primarily at the forefront. Defensive stocks are associated with consumer staples, real estate investment trusts (REIT), and utilities. Stocks in these groups are coming out with strong earnings despite high inflation.

Defensive stocks in these groups are based on underlying assets that tend to be less prone to economic downturns than others. These are used by traders to hedge during an economic slowdown.

The REIT stocks offer individual investors an opportunity to buy shares in portfolios that receive income from the real estate sector. This includes companies that own, develop, and manage residential, commercial, and industrial properties.

Utilities and consumer staples are considered stable options when trading in volatile markets. 

Rising rates increase volatility concerns

Traders at Simpler looked at the underlying industry groups to get a sense of what took place last week with the losses across the board.

The increased yield nearing 3% on the 10-year treasury created a negative response by higher growth stocks. (These do not tend to fare well in a rising interest rate environment.) Higher interest rates also tend to push the U.S. dollar higher because foreign investors are attracted to the higher U.S. yields.

A rising currency adds additional pressure on all commodities.

The impact of that higher dollar was first seen in Brent Crude. The value of Brent Crude is used as a benchmark for the price of oil worldwide and the product is referred to as a sweet light crude oil. This oil, extracted from the North Sea, has a relatively low density and has low sulfur content.

Rising interest rates also tend to affect investor psychology. The markets are highly psychological and reactive to catalysts – interest rates, news, and earnings releases.

One area that traders measure the mood of the market is the volatility index (VIX). This “fear index” had a big spike. There had been a period where the market appeared to be decompressing and this had pointed to a potentially more stable market environment.

This spike was not good news for some. Traders at Simpler want volatility to subside and allow the broader markets to stabilize and eventually trade higher.

Top performers earnings shuffle

Traders, as a practice, review the top performers and the top decliners on the S&P 500 when earnings reports are released. Taking time to examine stocks that were up the most despite the S&P 500 being down almost 3% on the day Friday can point out the big movers.

A top mover which is still on the upside despite a tough market is Kimberly-Clark. The company came out with earnings and performed well despite high inflation. This company has been able to pass increased costs on to customers. The stock gapped higher and closed up 8% at one point.

If the broader market was in a more confirmed uptrend, traders would take a close look at this ticker. The gap up by Kimberly-Clark into an eventual base breakout if the markets are in good standing is a very powerful move and points to further upside. Yet, the expectation is this market is going to be an exception.

Another top performer, United Airlines (UAL), gapped up prior to trading on Thursday following an analyst upgrade.

While we are seeing stocks in other areas drop due to higher interest rates, earnings remains the overall primary driver for big moves in the market. Earnings are and have been the primary driver of these stocks.

S&P 500 under performers take note

Simpler’s traders also look at the “percent down stocks” – the names that were down the most.

Here are decliners worth noting:

  • Freeport-McMoRan (FCX) – This company came in with numbers that were good, but the stock had a serious drop. The reason for this sharp decline is the company guided earnings lower as it relates to copper sales.
  • HCA Healthcare dropped. This hospital company had guided earnings and sales lower going forward due to increased labor costs.
  • United Health Services (UHS) also fell. UHS is in the same industry group as HCA, so that causes a trickle effect where companies guide lower due to economic constraints. This causes a deterioration in similar stocks.

Cross-currents from news

There are many causes in the way of cross-currents of headline-related news, such as worries over a lockdown in China and ongoing supply chain issues. Stocks also are being pushed around – up or down – due to earnings reports.

With all of the lower results, traders can use this information and work to anticipate moves within other industries and other companies as the earnings season continues.