S&P 500 (SPY) Is Moving Towards 4100 As Sell-Off Intensifies

Key Insights

  • Powell’s remarks triggered fears of an economic slowdown, leading to a sell-off in equity markets. 
  • Nasdaq is down by almost 3% amid strong sell-off in tech stocks. 
  • A move below the 4100 level will push S&P 500 towards the 50 EMA at 4085.

Powell’s Comments Put Pressure On S&P 500

S&P 500 is down by more than 2% as traders react to Powell’s speech, which pushed traders out of riskier assets.

Powell’s speech was focused on inflation. He noted that the Fed should solve the problem before public’s inflation expectations become entrenched at higher levels. Powell spoke about economic pain due to tight monetary policy but noted that high inflation was more dangerous.

Markets were volatile when Powell spoke. Later, traders focused on the “economic pain” part of his message, and S&P 500 found itself under huge pressure.

S&P 500

S&P 500 faced resistance near 4220 and declined below the 20 EMA. Currently, S&P 500 is testing the support level at 4115. In case this test is successful, S&P 500 will move towards the next support at the 50 EMA at 4085. A move below the 50 EMA will open the way to the test of the support at 4040. On the upside, S&P 500 needs to get back above the 20 EMA to have a chance to develop sustainable upside momentum.

Tech Stocks Retreat, Led By Alphabet And NVIDIA

Today’s sell-off is broad, and all market segments are under pressure. Not surprisingly, tech stocks are leading the sell-off. Alphabet is down by almost 5%, while NVIDIA stock is losing more than 6% of its value.

Notable losers in the tech segment include Affirm, which is down by 20% after the release of a disappointing quarterly report, and Dell, which cut its fiscal 2023 guidance.

Electronic Arts is up by about 5% after a report suggested that Amazon would not make an offer for the company.

Most likely, traders will focus on general market sentiment today. Powell’s speech has led to a strong reaction in markets. Traders are moving out of riskier assets, so tech stocks will remain under strong pressure today.

At this point, it looks that it will be hard to find safe-havens ahead of the weekend. Energy stocks, which have performed well in recent trading sessions, are also moving lower as WTI oil declines on demand worries.

For a look at all of today’s economic events, check out our economic calendar.

Why Affirm Stock Is Down By 10% Today

Affirm Stock Dives After Earnings Report Fails To Meet Analyst Expectations

Shares of Affirm gained strong downside momentum after the company released its quarterly results.

The Buy Now, Pay Later (BNPL) company reported revenue of $361 million and a loss of $0.57 per share, beating analyst estimates on revenue and missing them on earnings. In the current fiscal year, Affirm expect to report revenue of $1.29 billion – 1.31 billion.

Gross merchandise volume increased by 115% on a year-over-year basis, while the number of active consumers grew by 150%.

Yesterday, the company accidentally released some metrics during the trading session, and its shares spiked. However, the stock found itself under huge pressure after the full earnings report was released, and selling activity remains strong today.

What’s Next For Affirm Stock?

Analysts expect that Affirm will report a loss of $2.22 per share in the current fiscal year and a loss of $1.28 per share in the next fiscal year.

At a time when Treasury yields are rising fast and everyone talks about inflation, the market is especially sensitive to growth rates of loss-making companies.

Importantly, the market’s expectations may differ from analyst expectations, so beating analyst estimates may not be sufficient enough to push the stock higher.

Affirm stock made an attempt to settle above the $175 level roughly three months ago, and it has already lost about 70% of its value. However, it remains to be seen whether speculative traders will rush to buy Affirm stock after the strong pullback.

The market has started to price in aggressive rate hikes from the Fed. Shares of loss-making companies are especially sensitive to higher rates as their valuation is based on discounted cash flows. As rates increase, their valuation automatically moves lower. In addition, the market sentiment remains bearish towards such plays, so Affirm stock will have a good chance to develop additional downside momentum in case it manages to settle below the $50 level.

For a look at all of today’s economic events, check out our economic calendar.

A Divergence Between S&P 500 and the Stock Market Breadth May Signal a Market Top

SPX Daily Chart

Based on the comparison between the Percentage of stocks above 200-Day average and the SPX for the past 10 years, the divergence happened since Feb 2021 as the SPX continue to trend higher, the number of stocks participated in the uptrend is getting lesser, deteriorated from 90% to 42% as of last Friday since Feb 2021.

In fact, many growth stocks such as Affirm Holdings (AFRM), CrowdStrike Holdings (CRWD), Fiverr International (FVRR), MercadoLibre (MELI), Sea (SE), Twilio (TWLO), DocuSign (DOCU), Roku (ROKU), PayPal Holdings (PYPL), etc…experienced big drawdowns range from 32%-65% from their all time high.

There are only a handful of outperforming stocks like Apple (AAPL), Microsoft (MSFT), Lam Research (LRCX), Broadcom (AVGO), Qualcomm (QCOM), etc… supporting the S&P 500 index.

The divergence between the SPX and the stock market breadth are certainly not a healthy sign for the bull market especially it has been persisting for nearly 10 months. It might only take a few early capitulations from the funds to trigger a broad market sell-off when the market is at the vulnerable point.

It can be noticed from the chart that 50% level is a support. When the percentage of stocks above 200-Day average dropped below 50%, there was a relatively sharp sell-off in SPX, as highlighted in orange color in 2011, 2014, 2015 and 2018. The market breadth is often acted as a leading indicator before the damage hits the SPX.

Current Market Outlook on S&P 500

S&P 500 did have a rally after an oversold condition at the support area while there was presence of demand as pointed in last week’s article. Detailed analysis can be found by watching the price volume analysis for the market outlook on YouTube.

As shown in the screenshot on 8 Dec from my private Telegram Group for Mastering Price Action Trading course above, the four US major indices – S&P 500 (SPX), Dow Jones (DJI), Nasdaq (IXIC) and Russell 2000 (RUT) are likely in a consolidation with high volatility to both sides.

It is obvious that there was an increase of supply on the down wave since Black Friday selloff, which is yet to be tested. As S&P 500 approaches the resistance zone at 4700, it could be vulnerable for a correction when the sellers step in to lock in profit or initiate short positions. Should a correction happen, the previous swing low near 4500 is a natural area for buyers to step in for bargain hunting.

It is critical to judge the supply level together with the characteristics of the price action (spread and velocity) to anticipate next move. For a bearish scenario, watch out for a Wyckoff up thrust (false breakout) with increasing supply followed by a break below 4650. For bullish case, S&P 500 needs to commit above the resistance level at 4720.

Based on the market breadth and the Wyckoff phase analysis on SPX, a trading range between 4500-4700 is expected. There could be other headwind ahead such as Fed’s tapering of the bond-buying program and an urgency for interest rate hike, which I will be discussing in my weekly live session on Sunday. Click here to visit TradePrecise.com to get your weekly market insights straight to your inbox for free.