Image: Seekingalpha

The major stock indexes are facing a key test next week after finishing this past week on a disappointing note.

The Dow Jones Industrial Average managed a 0.8% gain over the five days of trading. But the S&P 500 rose just 0.45% and the tech-heavy Nasdaq actually dropped 0.2%.

Beneath the surface, there are signs of weakness. The small-cap Russell 2000 index reversed lower, falling 1.5% for the week to a 6-month closing low. The benchmark index has broken decisively below its 200-day moving average.

Market internals also flashed warning signals. The advance-decline line showed more stocks falling than rising despite the major indexes eking out slight gains on the week.

This signals that big cap stocks are masking underlying deterioration in the broader market. The S&P Equal Weight index, which gives each component equal weighting rather than being skewed toward the largest companies, rose just 0.2% last week.

The market rally attempt is clearly struggling to gain momentum. Equities bounced back strongly on October 12th after September consumer price inflation came in cooler than expected, spurring hopes that the Federal Reserve could slow its aggressive rate hike path.

But the major indexes quickly hit resistance levels and then sold off into the end of the week.

The S&P 500 and Nasdaq Composite failed to hold above their 21-day moving averages. The Dow hit its 200-day line multiple times but could not break decisively above it.

Meanwhile, the CBOE Volatility Index, or VIX, spiked on Friday to nearly reach its highest point in five months. The “fear gauge” rising to new highs could signal more downside ahead.

Treasury yields declined on the week, with the 10-year Treasury note falling 15 basis points to 4.63%. But yields remain stubbornly high by historical standards. The U.S. dollar extended its winning streak, reflecting its safe haven status amid global economic uncertainty.

Among sectors, energy and health care stocks showed some strength on the week. Information technology and communications services were relative laggards.

What To Watch In The Week Ahead

Next week, earnings season kicks into high gear which could make or break the recent market rebound attempt.

Tesla headlines the slate of big technology and communications companies reporting quarterly results. The electric vehicle pioneer has seen analysts slash Q3 earnings forecasts leading up to the print on Wednesday after the bell. Consensus calls for EPS to plunge 30% year-over-year to 73 cents, which would be the weakest quarterly profit since Q3 2020.

But beyond the rearview metrics, investors will key in on any positive forward guidance from Tesla executives around production, demand trends, and new models like the long-delayed Cybertruck.

This past week, TSLA stock initially rallied over 5% to start the week before giving back all the gains and then some. Shares finally broke below the 50-day moving average on Friday, closing 3.6% lower for the week.

The stock had shrugged off a drumbeat of bad news for months. Now it faces a critical test at earnings.

Can Tesla power higher on an upbeat outlook? Or will more disappointing results short circuit the recent rebound?

Chip stocks face a huge week with over 20 semiconductor-related companies slated to report. Headliners include ASML, Lam Research, and Taiwan Semiconductor.

Their conference calls and guidance could set the tone for tech earnings season. Specifically, investors will listen for any changes in capital spending trends for data centers and PCs along with forecasts around supply chain normalization.

Among other mega-cap techs due to report next week: Netflix, IBM, AT&T and American Express.

Winners & Losers From Earnings Flood

As the avalanche of earnings rolls in, investors should watch for which sectors and industries hold up well or get buried in the icy results.

Pay close attention to how stocks react to their own results as well as commentary from management teams. Are companies issuing positive forward guidance or disappointing with weaker forecasts?

Focus on relative price strength, using key support levels as guides. Stocks that plunge through their 21-day or 50-day moving averages on bad news should be sold immediately. Hold winners that gap up on strong results.

Be nimble and willing to quickly cut laggards that signal more downside. Let winners run to build profits.

Also watch for possible sympathy moves. Competitors and suppliers in the same industries will frequently move together depending on whether results reflect an industry-specific trend or company-specific execution.

What To Watch In Commodities

In commodities, crude oil prices jumped 5.9% this past week to $87.62 per barrel. Gasoline futures spiked even higher, surging 8.3% for their best week since March.

The energy complex drew strength from renewed Middle East tensions and the Biden administration imposing tighter restrictions on Russian oil exports.

With the OPEC+ cartel determined to keep supply tight and geopolitical risks lurking, oil may have bottomed out after plunging over 30% from June peaks.

A continued rally in crude prices from under $80 toward $90 or higher could re-ignite inflationary pressures. That could force the Fed to keep hiking rates aggressively, even in the face of slowing growth.

But the oil services sector stands to benefit if the commodity uptrend persists. The Energy Select Sector SPDR ETF (XLE) bounced 4.5% this past week as exploration and production stocks rebounded.

Key Levels To Watch

Technical indicators point to more choppy trade in the week ahead as stocks navigate the treacherous earnings minefield.

The S&P 500 closed Friday just below its 21-day moving average, which will be pivotal to hold. A decisive break above the 4150 level could signal a rebound toward the 200-day line near 4300.

But failing to hold the 21-day line puts the 2022 lows around 3650 back in play.

The Nasdaq faces resistance at its 50-day line, currently around 11400. Clearing that level as well as the September highs near 11800 would suggest a run at the August peaks above 13000.

On the downside, slipping below 10800 would point to a retest of September lows below 10000.

Conclusion

After a disappointing finish to an expectation-breaking week, the major indexes face a critical test in the week ahead.

Earnings could supercharge stocks or short-circuit the recent rally attempt. Hundreds of reports flood in along with pivotal updates from the Fed and economic data.

Investors should stick with proven leaders displaying robust relative strength. But be quick to cut laggards on any negative earnings reactions. Keep powder dry to deploy into emerging opportunities.

With risks remaining elevated, investors need to stay nimble and flexible. The uptrend remains intact but shaky. Expect more volatile swings and ultimately a resolution whether stocks break out or break down.

Buckle up for a wild earnings-fueled ride this week. The markets face a moment of truth.