Can Stock Market Rally Higher In Volatility?

In this article:

• Internal signals show market shift
• Watching the dollar vs. the Fed
• Will market strength hold up?

Will the winning numbers in July continue into the close of summer?

Stock market price action moving higher last week suggests a shift in investor sentiment that bodes well for a continuation rally.

Yet, the stock market faces a precarious battle in August even after gaining ground last month. The market must navigate recently raised benchmark interest rates, government officials “reassessing” recession despite back-to-back quarters of negative gross domestic product (GDP) growth, and inflation holding at historic levels.

In the middle of these brisk market headwinds, this week is kicking off with a direct theme for traders – keep it simple.

Can the stock market sustain the rally?

Bullish sentiment gained traction to start the month early in the session Monday, but the stock market couldn’t sustain a rally higher. A mixed day turned into lost momentum just minutes before the closing bell.

In the market today, the Dow closed at 32,798.40 points to dip .14% (dropping just 46.73 points on the day). The Nasdaq slipped to 12,368.98 points for a .18% drop while the S&P 500 was slightly down by .28% to 4,118.63 points.

Despite late afternoon losses and an overall flat day in the indexes, the climb higher last week fueled expectations of a more bullish market in the near term.

Internal market signals significantly improved last week and led the way for increased bullish sentiment heading into August

The internals were already leading price action and improved across the board. This movement implies relatively good breadth and is a bullish sign as long as it lasts.

While internal signals appear ready to squeeze higher, this market may not be ready to fire.

Near-term price action is showing market signals to be a bit too hot on the intraday time frames, which is a hot signal for an expected pullback to rising support.

The expectation is that the pullback to intraday support will hold, and the charts will try

and trend higher. Traders are urged to be patient on swing trade entries, especially with the historical influx of new money that comes into the markets on the first of the month.

Still, traders are considering that this rally could push higher than many people expect. The rally structure to this point appears solid enough that the market could potentially be the beginnings of a legitimate reversal pattern set on retesting previous highs.

Stock charts have compressed into oversold coil and now the signals have collectively all thrust higher which could push into new uptrends.

Playing the dollar vs. following the Fed

This market has presented a variety of new scenarios to many traders who haven’t worked in this type of environment before.

The dollar is a key component of what is happening in the market. And the dollar is showing that a short squeeze may be in play.

Because the dollar got too extended – with negative divergences – traders are now seeing, and may continue to see, a long squeeze (opposite of a short squeeze) in the dollar. This will have the effect of driving up risk assets across the board.

While traders keep their eye on the dollar, the Federal Reserve (Fed) is still a strong factor in market movement.

Fed action last week fueled bullish sentiment.

The Fed raised the benchmark interest rate by .75% – less than expected – and Chairman Jerome Powell indicated the Fed may ease rate increases as the year progresses depending on economic data. Powell also held firm that the U.S. economy is strong and not heading into a recession.

The market appears to be interpreting Fed actions (and Powell’s words) as a pivot that supports inflation control. This is bullish as it lowers the risk of future aggressive rate hikes, which the market likes.

The next Fed meeting isn’t until September, so for now the monetary message to the market is… rally on.

Keep in mind that this may be a policy mistake, i.e. it is essentially an early declaration that the Fed has defeated inflation. Traders should consider that any such declaration could be proven wrong.

Market may be stronger than expected

Even after a flat to down day Monday, stock market gains last week may still bode well for near-term positive price action.

The S&P 500 gained 4.3% with price action late last week that added further conviction of continuing a near-term uptrend. The weekly S&P 500 chart firmed up momentum levels as well. A positive shift for these momentum indicators could brighten the intermediate-term outlook for the markets.

And, the Nasdaq gained 4.7% last week led by another strong week for semiconductor stocks as well as sharp gains in most mega-cap technology stocks.

The stock market experienced a broad-based rally last week as upside momentum picked up following the Fed meeting results as well as the release of weak second quarter GDP numbers (indicating back-to-back quarters of negative growth).

The ability of the stock market to overcome an event-heavy calendar last week (Fed meeting, GDP results, and earnings reports from some of the biggest companies in the world) was impressive.

Stocks pushing higher despite data and earnings that were not always positive, shows a shift in sentiment to a bullish bias. This is unlike last quarter when positive earnings and economic data were not rewarded amid a realm of uncertainty.
This shift in sentiment will be put to the test this week and beyond. Simpler’s traders plan to keep trades simple and focused to avoid any traps or sudden shifts in the market.