SPY: Waiting For July Earnings (Technical Analysis)

The market (NYSEARCA:SPY) is waiting for the results of its July earnings checkup, to find out how sick this market really is. It may not be as sick as it thinks and that would provide the basis of a technical bounce up from the recent bottom at $364. Or the earnings results are going to send it to the emergency room for hospital admission. In that case, the SPY will break below the recent bottom and go looking for a lower bottom.

July earnings are the reality check on the SPY. The recent attempt at a technical bounce in a bear market failed because of the lack of any solid earnings news. That creates the vacuum that takes the SPY lower, retesting the recent bottom at $364. Bad news headlines on inflation or consumer sentiment drive the SPY lower, as it discounts that news and guesses about lower earnings in July. Now we will find out if the guess on July earnings was right or wrong.

Companies reporting earnings in July, already know what those earnings are going to be like. Right now they are just tweaking the final numbers for the announcement. They may already be guiding analysts lower. After all, they do want to beat lowered earnings expectations. That’s the way the game is played. However, there are always the negative and positive surprises in earnings that the analysts did not see coming down the pike.

Here is our daily chart showing the bearish, short term profile for the SPY and indicating to us that it will retest the $364 this week because there are few earnings reports:

At the top of the above chart is our proprietary signal showing the percentage of stocks in the Index that have our SID Buy Signal. You can see the downtrend as it drops from 12% down to 4%. It just bounced back up to 7% as the SPY bounced and then failed. It has become a stock-picker’s market.

Notice the red and blue downtrend arrows above price. The downward price momentum is increasing. Also notice the failed, technical bounce attempt and its current breakdown toward $364. The shortened holiday week and the weak signals below the price chart lead us to believe that the SPY will retest $364. Then what?

Well, as you can see on the price chart, the drop has already discounted much of the bad news we know about. The SPY is looking out into the future and that may be worse than what we will see in July earnings. If the short term news is not as bad as the anticipated long term recession news, then this oversold market will have a technical bounce as earnings roll out in July.

If the earnings turn out to be as bad as expected, well then it is already in price and support at $364 may hold for a little longer. We think there will be a technical bounce at $364 because of earnings.

Longer term, there is no bottom in place yet and if inflation, the war, supply disruptions, the rising dollar and interest rates keep leaning on the market, then the bottom will be somewhere below $364.

We prefer to use the weekly chart because it has more reliable signals than the daily chart. It eliminates some of the daily “noise” caused by breaking news on the daily chart. Signals tend to reverse more often on the daily chart. We try to avoid those day to day reversals that are of interest to the day traders and robots.

Here is our weekly chart and you can see our proprietary Sell Signal at the top of the chart. There are no technical buy signals showing on this chart. It is oversold and looking for a technical bounce. That requires some better than expected earnings for a technical bounce.

NOTE: You can see all the signals below the price chart are trying to improve. We doubt it will happen this week as the SPY waits for the reality check that comes with the July earnings reports.

Conclusion

The SPY is waiting for some good news that will launch a technical bounce and maybe the July earnings will be better than expected. The market is discounting a recession and the July earnings certainly will not be in recession. That recession is the SPY looking six months ahead. As you can see on the charts above, the SPY is oversold and ready for a technical bounce. We will see if better than expected earnings in July provide the bounce. As you can see on the weekly chart, price did bounce to fill the gap down and then died last week. Now it is targeting a retest of $364. Even if we get an earnings bounce, it will just be a bounce in a bear market that still has our proprietary Sell Signal. This is still a bear market looking for a bottom. However, it can always enjoy a technical bounce, especially when it is extremely oversold. An end to the war would provide a great bounce.