The Market Drop
It’s been a rather traumatic start to 2022. The $SPX lodged a new high for the year on the second trading morning of 2022 and has been moving lower since then. Ouch! I’ve marked the chart up with a red arrow marking the top. Red lines show equidistant moves. It is not uncommon for the market to make moves of roughly the same distance before bouncing. There is a particular style of trading around these moves. This measuring tool was looking like a potential rally point this morning, but it rolled over hard. The market slammed lower as the bottom fell out and the market dumped into the close. Yuck.
America’s S&P 500 index has dropped down 7% since the start of the drop, whereas the Nasdaq 100 index is down 10%. Those are pretty significant drops to start the year. Using the chart below, the $SPX 200 day moving average (DMA) is at 4427.63 as shown by the legend. Directionally, that is about 65 points below the close. Adding perspective, we moved down 120 points in the last hour.
I like watching the 200 DMA for support at that line on the chart on the first surge lower to that level. For those new to investing, I am saying I want to be prepared to get long after a big downdraft and the 200 DMA is a good location to watch for a reversal from down to up. The green line shows on the Nasdaq but it is just below the price action so far on the $SPX.
Nasdaq 100 – $NDX – sits below the 200 DMA (14999) shown in green. For me this is a good place to expect some sort of support, but it has not shown up yet.
Below is an example for the $SPX using the weekly equivalent to the 200 DMA which is the 40-Week MA. Black arrows mark bounces at the 40-WMA as the market made it’s first pull back to touch it. It doesn’t always work but it is definitely more often than not.
Options Expiration Days
I also like to keep track of options expiration days and each month I draw another line on the chart. It occurs on the third Friday of the month, anywhere from the 15th to the 21st of the month. For December it marked the short term bottom for the Santa Claus rally. November it marked the top of the two month rally. October marked the breakout above the downtrend. September, the market dropped quickly and chopped around for a month. In May, June, July and August, it marked a reversal of small downtrends.
Hopefully I’ve made my point that it is a good date on the calendar to be aware of.
Reversion To The Mean
I recently published some articles suggesting the market breadth is shaping up for a larger correction. When markets correct (drop in an uptrend), the drops are faster than we think, and the rebounds are quick and vicious forcing short positions to cover, enhancing the speed of each rally. Remember the market does not typically make 20% drops all in one blow, but in a series of waterfall events.
There are exceptions. in 1987, the market was down for 7 days in a row, then fell 25% in one day. Markets now have circuit breakers to prevent that kind of decimation, as well as automated trading systems that usually try to rally as the market approaches these big downsized moves. Thursday’s Dow move was 850 points from high to low. I have noticed that 1000 point moves on the Dow tend to be reversal days. That doesn’t happen very often. Statistical outlier days set up reversion-to-the-mean trades the other direction. Will Thursday’s price action prove to be just that?
The bears are starting to get comfortable. I like to use my Schnell Strength indexes to help spot reversal points higher. This is still declining but it is below 25% which is the zone where we want to be at least looking for a bullish reversal. Last year we had 8 of these buying lows that gave us an excellent opportunity to get long as it moved back above 25%. It’s still difficult sometimes, but at least we can use a tool like this to help us buy when we are uncomfortable and sell before it gets very weak like early in 2022.
You may like to see more of the work we do at ospreystrategic.org, so check out the free stuff tab there. You’ll find some original content to help keep you on the right side of the trade.
On December 21st, I produced a video with StockCharts.com talking about the need to be ready for a more difficult trading environment in 2022. That seems to be playing out. You can also check out this week’s Daily 5 as well as the Market Buzz for more information.
It has been all down hill for the indexes in 2022. I’m looking for the ski-lift taking us up to start soon! I don’t know when it will turn, but our tools will help us figure that out. If you’d like some perspectives as that starts to happen, consider a membership at ospreystrategic.org.