Technical analysis: What the 5-year business cycle says about the market setup now

Fidelity Investments' John Gagliardi joins Yahoo Finance Live to discuss market volatility, inflation, Fed policy, and the outlook for markets.

Video transcript

JARED BLIKRE: And we're going to stick with the markets, but shift to something a little bit different here. And we have John Gagliardi, who works for Fidelity Investments. And John, it's great to see you here today. Thank you for joining us. And I do have some of your charts. And there's a lot going on here. Here is the S&P 500. It goes back five years. And I just wanted to present this because this is what technical traders look at. This is what the pros use. And just kind of lay out what you're seeing in the markets and this chart here, please.

JOHN GAGLIARDI: Five years is a great time frame. As you know, Jared, there's a five-year business cycle. And every five-year business cycle, you're going to get expansion, peak, recession, trough. Now, five years is not an exact science. Sometimes it's four. Sometimes it's seven. But on average, it's been five years since World War II, and Fidelity has a ton of data about this on our website.

And if you notice, if you look at the last three plus years, we had a beautiful uptrend. And you could see that uptrend line that I drew. And then it broke out. We broke out to all-time highs, and the market kind of went vertical. A lot of that was on the heels of Fed stimulus and trillions of new dollars getting into the market, the M2 money supply. These are all things that you could verify. And the charts of that look a lot like this chart.

And now we know the Fed is pulling it in because of fears of inflation, which are all well founded. And the market's coming in, but following the business cycle, this looks pretty spot on. And we're hitting a support level. Now I don't know if this is the support. But what used to be resistance for 10 years should give you some level of support.

JARED BLIKRE: Well, let me move on to another chart here. I have the ARK Innovation Fund. This goes back to July of 2020. This is-- we were just talking about the pandemic darlings round tripping their gains with Ines Ferre. This is another one, but this is an ETF in other words. So I know you're highlighting some of the candlestick formations here. And a lot of Wall Street people have been punting this because it's been so devastated. I'm just wondering what you see here.

JOHN GAGLIARDI: Yeah, what we're seeing is the trend going full circle, right? It's no longer going up. You can't say it's going sideways. It is going down. And whenever it's going down, it feels like they bring out all the market technicians such as ourselves. And they say, where is the bottom? What is the bottom? And many of the typical things that you look for, you look for a shift in relative strength, a rise above 30. According to all the textbooks, that is a area where you should see some lift. And it failed.

And then you look to MACD, which is an indicator that comes out a bit after relative strength, and that got very close to the 0 line and backed away. That was another fail. And of course, if you look at the individual candlesticks, which is right on the chart itself, you'll notice there was a hammer. A hammer has a long tail on the bottom signifying that there was buyers that lifted. Now each bar-- and this is, again, a five-year weekly chart. Each bar is a week. And it's had two weeks since that hammer to form some sort of a bottom and get some sort of lift. And there's been no lift.

So when all of these indicators fail, you have to think, OK, this is a downtrend that is not complete. It wants to continue. And the next logical place is, it might go sideways. It could go sideways and form a base for weeks, months, years, because, really, we have no idea.

JARED BLIKRE: As fellow CMT member Brian Shannon likes to say, they don't scare you out. They wear you out. And I think that's what we could potentially see in a lot of these names. Now, I do want to ask you about the general-- I want to ask you about how you're seeing the economy now. We've been talking about some earnings, retail on the retail front. Huge disappointment by Snap. We've got some huge disappointments by retail. And we've been talking about the economic indicators kind of shifting down suddenly. I'm just wondering what you're seeing in some of your work.

JOHN GAGLIARDI: Yes, I think everything is Fed dependent right now. I've been on a lot of media lately, and everyone asks, what's your best indicator, or what are you looking at in economics? I'm looking at July, because June, we're going to have another Fed rate increase. July, we're going to probably have another. And by the time the Fed is done, the overwhelming majority of economists out there are calling for 50 basis points in June and another 50 in July.

Now, that's subject to change. They were saying 75, and that has come off the table, as the Fed said in the last meeting. So I think by July, we're going to have a much more clear picture of both. What does inflation look like? And what are the headwinds that the Fed is seeing? Because I think everything is revolving around that analysis.

JARED BLIKRE: Yeah, hike to the break. So I got one more question for you and more of a statement. You and I are going to be participating in a panel. I'm actually going to be hosting it this Thursday. It's sponsored by Fidelity Investments, your company. And it's actually an all-day event, or an afternoon event, as you can see there. Now I am hosting the panel at 4:00 to 5:00-- from 4:00 to 5:00 PM. And we're going to talk about technical analysis, and that's kind of why I put those charts up with all the squiggly lines up in the first place. Tell us what investors and traders are going to learn at this seminar.

JOHN GAGLIARDI: So much, because we have such a great lineup with yourself hosting. I'm on the panel. We have JC Parets. We have Dave Keller. So we have folks from All Star Charts and stockcharts.com. It's going to be a phenomenal panel. I highly recommend anyone who's looking for answers. We're talking about, where do we see the market? Where do we see-- what's our most interesting entries? And what are our most interesting exits?

I think that's something that us technicians don't talk about enough about how to get out, when to get out, what is a logical place to get out. And we'll cover all that and answer client questions. We have dozens of client questions we're prepared to answer. And that's really where it's at, right? We're here to help the audience.

JARED BLIKRE: And John, it is critical. Risk management is always critical, but never more than now. John-- excuse me, John Gagliardi, Fidelity Investment regional brokerage consultant, thanks for your time.