The weekly chart pattern created by the June E-mini NASDAQ-100 index suggests that investors should prepare this week for volatility and a possible steep break. Fundamentally, the move could be triggered by bearish earnings reports from technology giants Apple and Facebook. Additionally, the selling pressure could come from the actions of several central banks.
This week, the Fed meets Tuesday and Wednesday, and it is widely expected to take no action on interest rates, while sticking to its message to remain cautious and that a rate hike isn’t imminent. However, if its monetary policy statement contains stronger language than expected, traders may react by selling off higher risk assets.
The Bank of Japan could also trigger a sell-off in the equity markets when it makes its monetary policy announcement on Thursday. There is uncertainty with regard to what Japan is going to do. Traders are also worried that its actions may have no impact on the economy. The last time the bank took action, it announced negative interest rates.
There is speculation that the BoJ could announce more asset purchases and take steps to apply negative rates to bank loans. That is the potential risk to the stock market because it could be viewed as them trying to fine tune the negative rate story so that it actually helps the banking system. At this time, there is still some fear that the current program will eventually be negative for banks.
Technically, the main trend is up on the weekly chart, but last week’s closing price reversal top suggests a major shift in investor sentiment and momentum may be taking place. If confirmed by a trade through 4431.00, sellers could start a 2 to 3 week correction into at least 50% of the last rally.
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The main range is 3867.75 to 4584.50. Its retracement zone at 4226.00 to 4141.50 is the primary downside target.
Based on last week’s close at 4465.75, the direction of the market this week is likely to be determined by trader reaction to last week’s low at 4431.00.
A trade through 4431.00 will not only confirm the closing price reversal top, but it could trigger the start of an acceleration to the downside. The first target is a downtrending angle at 4369.25. Crossing to the weak side of this angle will put the index in a bearish position.
The weekly chart begins to open up to the downside under 4369.25 with the first major target the 50% level at 4226.00. This is followed by an uptrending angle at 4219.25 and a Fibonacci level at 4141.50.
The inability to follow-through to the downside on a move through 4431.00 will indicate that buyers are coming in on weakness to support the trend and prevent a steep break.
The June E-mini NASDAQ-100 Index could break if the Fed is a little more hawkish about the direction of interest rates in its monetary policy statement. However, the BoJ monetary policy announcement is likely to exert an even stronger negative influence on stocks. 10-Year Treasury Notes are likely to rise which should put negative pressure on stocks. In addition, weak earnings news from either Facebook or Apple could exert an even stronger bearish influence on the index. This could trigger the break that the weekly chart is indicating.