Last Friday was painful for equity bulls, as strength in the labor market forced markets to rerate rate-cut hopes. But the major US equity indices were already under pressure as bears defended crucial technical resistance. 
December was unique in that the S&P 500 posted a new intraday high – ticking 6100 on the 6th – still closed the month lower, down 2.5 percent. If the first six sessions this month are any sign, the downward momentum will continue. Until last Friday, the large cap index is down 0.9 percent in January to 5827.The index began last week in an up note, rallying as high as 6021 but only to close the session at 5975, up 0.55 percent. On the daily, conditions were oversold, but equity bulls were also fighting a potentially bearish setup in the chart (more on this here). It turns out Monday’s high was used as an opportunity to sell/go short by the bears.The S&P 500 has progressively made lower highs since peaking last month. Last Monday’s high kissed that trendline and reversed lower (Chart 1). That hurdle also lined up with horizontal resistance at 6020s. By the end of the week, the index was in breach of another lateral support at 5870s. Next decent support lies at 5670s. 
Friday was tough for the bulls, as the S&P 500 was punished for a 1.5-percent rout. The culprit was December’s jobs report. Against consensus expectations of an addition of 165,000 non-farm jobs, the economy added 256,000 jobs. The unemployment rate ticked lower to 4.1 percent, and hourly earnings grew 3.9 percent from a year ago. Markets that have rallied so much on hopes of lower interest rates found it hard to digest this strength in the labor market. In the futures market, traders now do not expect a cut in the fed funds rate until the second half.Giving credit where credit is due, the 10-year treasury yield was expecting this. The FOMC began an easing cycle last September by slashing the benchmark rates by 50 basis points, followed by two more 25-basis-point cuts. The 100-basis-point cut currently puts the fed funds rate at a range of 425 basis points to 450 basis points. On the day the FOMC began its two-day meeting in September, the 10-year tagged 3.6 percent intraday; last Friday, it closed at 4.78 percent. The long end of the yield curve has gone the other way.The 10-year has now rallied above both horizontal resistance at 4.3s and trendline resistance from October 2013 when it hit five percent and headed lower (Chart 2). Rates are overbought on the daily, so could come pressure potentially. In this scenario, there is immediate support at 4.5s, which, if defended, could then open the door to a test of five percent in due course. 
Simplistically, the higher the interest rates the lower the valuations accorded equities, as their underlying businesses get discounted using these rates. It is worse if leverage is used, which is mostly the case in the small-cap arena.The Russell 2000 small cap index is viewed – rightly or wrongly – as primary beneficiaries of lower interest rates. On November 25 (last year), it surpassed its prior high from November 2021, albeit barely – 2466 now versus 2459 back then – although no sooner than a new high was reached than the index reversed lower (Chart 3).Heading into last week, the Russell 2000 closed right at 2260s, which has been used as an important price point by bulls and bears alike going back to mid-July. Last Monday and Tuesday, bulls comfortably took out that resistance but only intraday. By Friday, the index was down 3.5 percent for the week, tumbling 2.2 percent in the session to 2189 as a stronger-than-expected jobs number poured cold water on rate-cut hopes. At 2100 lies important breakout retest.Evidently, sellers showed up on both the S&P 500 and the Russell 2000 at important technical levels. This was also the case with the Nasdaq 100. 
Last Monday, the tech-heavy index was denied at the underside of a broken rising trendline from last August’s low (Chart 4). This just about coincided with a falling trendline from last month when a new intraday high of 22133 was posted on the 16th. When it was all said and done, the Nasdaq 100 sliced through short-term horizontal support at 21150s to end the week lower 2.2 percent to 20848. There is decent support at 20600s.In essence, the Nasdaq 100 is now caught between 20600s and 21150s. Either way it breaks, momentum likely follows, at least in the near term. The S&P 500 similarly is rangebound between 5870s and 5670s, and the Russell 2000 between 2260s and 2100.More By This Author:Equity Indices Itching To Move Higher N/T
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