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Earnings and Fed Rate hike looming

It is a potentially pivotal week for investors, as the Fed meets for the next FOMC tomorrow. Many expect Fed Chair Powell to increase interest rates by another 25-basis point. Will this be the final rate hike of the cycle? 170 S&P 500 companies, representing nearly 40% of the total SPX market capitalization, will also report second-quarter earnings this week.


Stocks have trended higher ahead of corporate earnings and the looming Fed rate hike. Dow Jones Industrial Average has been strong, climbing for 12 consecutive days. Nasdaq Composite Index has also been on a tear, exploding 3,463.75 points or 31.54% from the March 2023 bottom.

The Nasdaq special rebalance has shifted the weightings in the mega-cap technology names within NDX, reducing the collective weights of the biggest names from 56% to 44%. The information technology sector in the NDX Index has declined slightly from 51% to 49%. APPL and MSFT retain their dominance, with their respective weights reduced to 11.5% and 9.8%. GOOGL falls from 6.9% to 5.3%. AMZN also slips to 5.3% from 6.9%. NVDA fell sharply from 7.3% to 4.3%. META dropped from 4.4% to 3.7%, and TSLA from 4.5% to 3.4%. AVGO benefited the most from the special rebalancing as its market cap weighting jumped from 2.4% to 3.0%.


Although the special rebalancing has created concerns, its impact on NDX and other stock market indexes has been nominal, at least from a near-term performance perspective. After the market closed today, MSFT and GOOGL reported and both exceeded expectations. However, the two stocks showed mixed results, with GOOGL up around 6.5% and MSFT down nearly 4% after-hours trading.


What are the charts suggesting for the SPX Index?


SPX has rallied 30.81% from the mid-Oct 2022 low and appreciated 19.92% from the Mar 2023 low. Both gains have been impressive. Can SPX still trend higher, and how much higher?


The recent breakout above pivotal resistances at 4,195.44/4,325.28 suggests SPX can rally higher, at least over the near term before a much-needed consolidation occurs.

Recently, the 7/12 and 6/30/23 gap-ups, the breakout above the 78.6% retracement (4,534,63) from Jan 2022 to Oct 2022 decline, and the Oct 2022 uptrend channel breakout above 4,495 (7/13/23) can extend the current rally toward 4,582-4,637 (Feb/Mar 2023 highs and the late-May 2023 breakout projection above 4,195.44) and above this 4,744-4,749 (Nov 2021 and 1/12/22 highs) and 4,818.62 (1/4/22 all-time highs). In a bullish environment, SPX can achieve 5,159 (mid-Jun 2023 breakout above the 4,325.28 projection).


Trading support rises to 4,516 (the extension of the top of the Oct 2022 uptrend channel) and below 4,398-4,463 (7/12 and 6/30/23 gap-ups), and 4,325-4,345 (50-day ma, 6/12/23 breakout, and 6/26/23 low).


Violation here warns of a deeper correction toward 4,195.44 (5/30/23 breakout), 4,111-4,118 (Dec 2022 highs and the bottom of the Oct 2022 uptrend channel), and 4,048-4,060.5 (Apr/May 2023 lows and 200-day ma). A breakdown below 4,048-4,060.5 negates the recovery and warns of the next SPX selloff.


Source: Chart courtesy of StockCharts.com

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