Rallying Stocks Take Breather, Broader Market Drops

Rallying stocks took a breather midweek as all three major indexes pulled back with the technology-laden Nasdaq leading the retreat.

A stock market that rallied just the day before was undercut by rising bond rates and a U.S. dollar determined to maintain its strength.

Netflix, Inc. (NFLX) stock spiking on a solid earnings report and Tesla, Inc., (TSLA) reporting earnings after hours weren’t enough to push the market back to the upside.

Rallying stocks take breather, broader market drops

Stocks that fired off the week with a sharp rally cooled off by midweek as the stock market dropped once again.

Price for the 10-year U.S. Treasury yield pushed to its highest level since 2008, closing at 4.125 on Wednesday. 

Rates for the 10-year bond shows this note has jumped more than four times the price compared to the lows during the pandemic two years ago.

As bonds rise, a surging dollar can also undermine equities.

The dollar has gained strength throughout 2022, rising to a 20-year high. The dollar hit $95.96 to end 2021, and was at $112.95 at the close on Wednesday. The dollar has been as high as $114.13 in September.

Technology stocks, once the darlings of the stock market during the pandemic, didn’t boost the market much.

After losing subscribers for two straight quarters, Netflix reported subscriber growth above 2.4 million for its third quarter earnings announcement Tuesday after the close. Netflix stock spiked by 13% and closed at $272.38 on Wednesday.

In contrast, Tesla fell short of earnings estimates following fewer vehicles being delivered and fears of diminishing product demand. Tesla reported earnings after hours Wednesday. Despite the weaker than expected report, the electric vehicle manufacturer finished positive for the open session, closing at $222.04 (up .84%). The stock began falling during after hours trading.

In the market today, the Dow closed at 30,423.81 points to fall .33% (dropping 99.99 points on the day). The Nasdaq dropped to 10,680.51 points for a .85% tumble while the S&P 500 stumbled .67% to 3,695.16 points.

Stop predicting, start targeting market structure

This stock market is still in a downtrend and the rally days this week were retracements within the downtrend, according to Raghee Horner, Managing Director of Futures Trading at Simpler Trading.

Raghee encouraged traders to avoid trying to predict where the market will go and instead focus on key market signals for trades.

“Predicting where the markets are going to go is not a trade, it’s a target, an incomplete conversation,” Raghee said. “Talking about levels – support and resistance – within the context of the market structure is trading.”

While listening to “predictive analysis” in mass media may be appealing, it is not necessarily beneficial to the individual trader. Volatility in this market makes it difficult for traders to understand the nuances of what is happening day to day. Many are tired of being “faked out” when expectations are for the market to move one way, and then it shifts suddenly the opposite way.

Raghee regularly explains to traders that volume analysis is a missing part of most trading strategies. While volume is commonly underestimated and misunderstood, it can offer the missing link to finding confident trades – even in a downturn.

She encourages traders to keep working through this puzzling market and focus on market signals that reveal movement through price and volume.