A Critical Debate For The Market: Important Read

Some interesting developments today that are not great.

This is an email explaining the market situation and why its critically important that if trades don’t work, I would take small losses here, rather than being stubborn.  When a rally starts, we are looking to get in early, and if we are wrong, out early.

On Thursday and Friday we got a nice rally starting from the SSI lows. Monday seemed to be all about Apple surging higher. Apple has a huge market cap so it can cover what is going on under the surface reasonably well.

• To paraphrase Ronald Reagan, ‘I would like a one-armed economist so he can’t say… on the other hand…’
• I feel like an economist writing this article.

Let me focus on the index (S&P500) right here.

DAILY:

Bullish case:

• Start with the thick black uptrend line because that is the most recent line.
• Price dipped below and the market surged to the upside. We would consider this a successful bounce off the trend line.
• The orange line is the 200 DMA. The 200 DMA is flat currently. if this was the next leg of the rally, this is an excellent place to look for a rally to start.
• The 50 DMA (gray) is trending higher and has crossed the 200 DMA. This has to happen in a bull market. Look at 2022 and the signal in March. Another bullish sign.
• The down-sloping black line is also showing us bullish things here. In late January we broke above the line and got everyone excited. For an uptrend to start you have to break the downtrend. Check that box.
• In February, the market traded lower the whole month. but it bounced off the downtrending line twice. We would consider that a successful backtest. Back tests show up often on a chart. The chart breaks through resistance, then pulls back to the line and bounces off it. I can show numerous examples but there could be an entire book showing examples on backtesting trend lines.
• The market moved above the 200 DMA and the 50 DMA with gusto on Thursday and Friday.
• The PPO is making a higher low, just around zero. Usually a great place to expect a bounce.
• The market is making a trend of higher highs and higher lows, in the face of bad news (recession, war, earnings slowdowns). Bullish.
• Broke above the major resistance in the 4025 – 4150 range.
• We haven’t seen many signs of demand collapsing, so this rally has reasons to continue, especially in the ‘service sector’ part of the economy.
• Industrials are trying to break out to new highs, so that points to a potential turn up in manufacturing for the ‘goods’ part of the economy.
• Market has been reversing near the first of the month since November. Time for an up month if February was down?
• Growth sectors took over the leadership in a big way last week.
• SSI’s turned up last week, signalling the start of another rally attempt.
• At that point we have so many bullish scenarios, it is hard to imagine this isn’t bullish.

Now let’s look at the bearish case:

• The market has stalled between 4025 and 4150:
  May 2022, early August 2022(went higher), September 2022 (hard reversal), twice in November 2022, twice in December 2022. Stretched the upside in early February for a few days, but that looked very bullish. Fell back below.
• At the time of writing, we are back below the 4025 level.
• When the market stalled under the 20 DMA (Blue), that is a bad sign. February 2022, March 2022, April 2022, early May 2022, late June 2022, late August 2022, early September 2022, so far on Monday March 7.
• The overall market is in a down trend. The chart is roughly in the middle of the range for the last year (4600 and 3500). Not top left or bottom right.
• Moving averages are still coiled together, so if the market breaks down here, this would be an important failure. another move down of 1% could go back below all three moving averages like April 2022.
• February 2023 would be a failed breakout. Monday’s high was a retest of the failed breakout above 4100 and failed (so far).
• Anyone short this market has been squeezed and the bounce off the 200 DMA has probably forced a closing of the positions. Why? Trend following systems use anchor points like the 50, 100 and 200 DMA to decide if they should be long or short. When above all three, they reduce position sizes or close it. If no one is short the market, the pain trade is lower. (The place most investors get hurt).
• March has been a place of major market reversals many times in history as the reality of lower earnings for the year becomes clearer.
• 20 DMA is pointing down and we stalled under it.
• Volume was low on the three rally days. Some of the lowest volume days this year. Back to back to back, declining slightly each day.
• PPO could be giving us a false positive turn like mid April 2022, September 10, 2022 and now.
• A PPO rolling over below zero on the daily chart is not a good thing in the short term.
• Macro backdrop is bearish, inverted yield curve, housing slowing down, leading economic indicators weak, Fed raising the cost of capital.
• The main peaks that stand out on the chart are still making lower highs. March, Mid August, February.
• A move back below the uptrend would be a bearish signal with the PPO below zero.
• PPO broke the long uptrend line off the October low, signalling a change in trend.
• A break of the long down trend black line would also be worrisome.
• If both black lines break, and below all three moving averages, I would expect a wave of selling.

WEEKLY

When we look at the weekly chart, we have the same two sided tape. I feel like an economist!

Bullish stuff:

• Rising low in price. 10 WMA is rising. 40 WMA in green has gone flat from down. Tilting down this week in the zoom panel.
• Price above 40 WMA, wobbling around the 10 WMA, back below it at time of writing.
• Full stochastic still in the top half of the range above 50%, could be a potential double low like October 2020.
• PPO above zero
• Price in an uptrend since October-  6 months
• Last weeks volume was similar to the up weeks in January.
• Sweet spot where the Fed is raising rates but near the highs suggesting a stop sooner than later. Usually happens while the economy is ok.

Bearish stuff:

• PPO flat, lost upward momentum
• PPO broke uptrend line just barely above zero. Not great.
• PPO rolling over below 1% is very weak.
• Full stochastic pointing straight down, near last pullbacks lows.
• Wanted more upthrust in the rally to really get it going.
• No comfort if price breaks below 4000.
• Fastest Fed rate increases in a long time if not ever.
• PPO trend on the daily and weekly at a risky spot to roll over. (As well as the 60 minute chart (Not shown).
• When all three PPO’s roll over at or near zero, it can be a major trend change from an uptrend.

This spring couldn’t be wound tighter either way.
If this rally does not work, I am fully prepared to take a small loss here, rather than having a big drop like the April to June move.
It is hard right here with the rally stalling multiple days so soon in the rally. I wish it were easy, but this is concerning.

When my SSI’s trigger, I take the signal. This may be like September where it broke down hard and trapped me with losses. But we have rules for entry that the momentum has to be improving for us to take new positions. If that fails, the market humbles us one more time. Nothing is perfect, and long only investors will not have an exit strategy. This is a critical inflection place on the chart. Bear markets give us a few of those unfortunately.

So far, the bear case is a ‘ what will happen if … situation’. I don’t know if it will, but as a technician, this is the moment John McLean either dies or survives. Cut up face from shattered glass, bruised body, falling down elevator shafts, just come for a few days for a holiday, bloody feet and all. (Reference to Die Hard with Bruce Willis). Stay tuned! Keep stops in place.

Regards,
Greg Schnell, CMT, MFTA