Strong second quarter financial results have been driving stocks higher over the past couple of weeks. According to FactSet, 83% of S&P 500 companies have reported a positive EPS surprise and 77% have reported a positive sales surprise. These trends are likely to continue, with about 47% of S&P 500 companies still preparing to report their second quarter earnings. Second quarter GDP also came in at a very robust 4.1% in a sign that the economy continues to expand.
Despite this strong performance, there are signs that these growth rates could be slowing down. Of the S&P 500 companies that reported their second quarter earnings, twice as many issued negative EPS guidance as issued positive EPS guidance for the third quarter. Facebook, Inc. (FB), Twitter, Inc. (TWTR) and other tech stocks also reported worse-than-expected second quarter earnings due to slowing user growth. Moreover, home sales have languished in key markets like Southern California.
Traders will be keeping a close eye on several key economic indicators over the coming week. Pending home sales data is coming out on July 30, the FOMC meeting announcement is on Aug. 1, and employment data is due out on Aug. 3. The Federal Reserve is expected to keep interest rates steady at 175 to 200 basis points, but traders will be listening to the central bank's language to see if anything has changed.
Broad Markets Move Higher
The SPDR S&P 500 ETF (SPY) moved sharply higher last week before giving up ground on Friday due to weak tech earnings. Traders should watch for a move toward the lower end of its price channel with potential support at R1 levels of $276.84 or the 50-day moving average at $275.40. Any upside is likely to be capped at the upper trendline at around $285.00. The relative strength index (RSI) moved to more moderate levels of 60.08, but the moving average convergence divergence (MACD) could see a near-term bearish crossover.
Industrials Lead the Way
The SPDR Dow Jones Industrial Average ETF (DIA) moved sharply higher last week, breaking through R1 resistance at $250.74 toward the upper end of its price channel. Traders should watch for an ongoing rally to upper trendline and R2 resistance at $259.07 or a move down to retest R1 support at $250.74. Looking at technical indicators, the RSI remains near overbought levels at 65.85, but the MACD remains in a bullish trend after recently surpassing the zero line.
Tech Stocks Look Bearish
The Invesco QQQ Trust (QQQ) broke out from upper trendline and R2 resistance at $181.74 last week before moving sharply lower on Friday following bearish earnings announcements from Facebook and Twitter. The false breakout could signal more downside for the index as it tests R1 support at $176.70. A breakdown from these levels could lead to a move to lower trendline and 50-day moving average support at around $174.54. While the RSI is neutral at 51.33, the MACD could see a near-term bearish crossover, signaling more downside head. (See also: Facebook Set to Drag Tech Stocks Lower.)
Small Caps Give Up Ground
The iShares Russell 2000 ETF (IWM) was one of the strongest performers of the year, but the breakdown from key trendline and 50-day moving average support at $165.62 could spell trouble ahead. Traders should watch for an ongoing move lower to S1 support at $160.04. If the index rebounds from the pivot point, traders should watch for a move to retest R1 resistance at $167.95. Looking at technical indicators, the RSI appears slightly oversold at 44.76, but the MACD remains in a bearish downtrend that may be accelerating. (For more, see: Trade War Threatens Small-Cap Stock Juggernaut.)
Charts courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.