2022 Bear market bottom part 3
Since Tuesday ( August 16th 2022 ) market has retreated from their respective resistance (S&P 500 from 4320, Nasdaq 100 from 13720 ) , and this a welcome retracement because it gives us a chance to get on the ride in the uptrend from bear market bottom. The best preparation for the future path, is by looking at the ( worst ) possible drawdown scenario in the future, once we have prepared for the drawdown, the upside will take care of itself.
This article will be split into the following sections,
Prelude
1) S&P 500 support and resistance
2) Nasdaq 100 support and resistance
3) (Bonus) SPX percent of stock above 90% after market is down 20%
4) Fed rate hike odds ( after chair Powell speech at jack hole meeting August 26th 2022 )
Prelude
Basic technical pictures, the market has been disconnected from 20 days Moving Average for too long and too far, it’s time for it to at least reconnect to 20 days MA before going higher ( or possibly retrace deeper )
Section 1: SPX Support & resistance
<S&P 500 chart >
Rising Trend Channel denoted in green dotted line
SPX Support zone= it’s best to think of support as a zone around 4150 - 4090, areas around here has many market memories, making it nice area of multiple technical confluence,
1) pause & retest many times in the past. With many swing high and swing low points.
2) 20MA is around 4150 area, making it a nice confluence area
3) 38.2% fib around 4090 area
SPX Resistance zone = resistance area are around 4300 to 4380, areas around here has many market memories,
1) Downward sloping trend at 4330, furthermore, market pause & retest many times in the past. With multiple swing high & swing low points.
2) 200MA is around 4320 area
3) 38.2% fib around 4090 area
For those who has missed the rally earlier, you can find an excellent entry point around 4090 – 4150. With stop loss around 3950 – 4000 level. If you are extremely risk averse, you can lower the stop loss to 3800, with a much smaller position sizing. ( because the risk of 4150 – 3800 is higher than 4150 – 3950, hence smaller position sizing )
Section 2: NDX Support & resistance
<Nasdaq 100 chart >
Rising Trend Channel denoted in green dotted line
NDX Support zone= Nasdaq 100 support zone is around 12900 - 13220, areas around here has many market memories, making it nice area of multiple technical confluence,
1) pause & retest many times in the past. With many swing high and swing low points, and downtrend slope support ( after breaking above the down trend line )
2) 20MA is around 13100 area
3) 38.2% fib around 13230 area
NDX Resistance zone = resistance area is around 13720 to 14000, areas around here have many market memories,
1) market pause & retest many times in the past. With multiple swing high & swing low points.
2) 200MA is around 14000 area
3) 50% Fib at 13900 area
For those who has missed the rally earlier, you can find an excellent entry point around 12900 – 13220. With stop loss around 12750 - 12890 level. If you are extremely risk averse, you can lower the stop loss to 50MA at 12330, with a much smaller position sizing. ( however I think the probability of dropping below 12750 is extremely tiny )
Section 3: S&P 500 percent of stock above 50 days moving average above 90% after 20% drop
<SPX % of stock above 50 days MA >
This is a bonus section that is actually an addendum to previous article ( 2022 stock market bottom part 2 ). This technical indicator is a breadth thrust studies. We are looking at the following criteria for to search for previous occurrence,
1) 20% market drop
2) % of stock above 50 days Moving average, increasing from as low as 10% to 90% ( which is a breadth thrust ).
From 2002 onwards, it has happen 4 times, ( unfortunately stockchart platform can only date back to 2002 ).
Therefore I have no choice but to take the data (screenshot) from Ciovacco Capital Management studies,
<SPX % above 50days MA table > Source : Ciovacco Capital Management, LLC
Next, plotting all the hypothetical drawdown percentage from previous 90% SPX stock above 50 days MA occurence, give us the following graph ,
Source : Ciovacco Capital Management, LLC
<SPX % of stock above 50days MA, hypothetical drawdown level >
Looking at the SPX graph, most of the historical drawdown % level cluster around 4220 to 4090, with 2 notable exception of lower levels at 3980 to 3800.
Section 4 : The fed rate hike odds
Fed chair Powell will be giving a speech this Friday( August 26th 2022 ), it is one possible area that might make market retrace deeper, depending on how his speech affect the rate hike probabilities,
<Fed rate hike watch tool>
( https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html )
We don’t have to watch/interpret his speech, just need to check out the above rate hike tool to see how market interpret the speech and affect the rate hike probabilities .
If speech is perceived to be dovish , then probabilities will be high for 50 basis point rate hike to 2.75–3%,
If speech is perceived to be hawkish, then probabilities will be high for 75 basis point rate hike to 3–3.25% in CME website )
In summary, barring very hawkish surprise from fed chair Powell speech in Jackson Hole symposium, the best action going forward is still buying the dip based on current evidence. We will see how it plays out in the next few days, I will update with a market review accordingly to further update on the possible path going forward.
In the upcoming part 4, I will share the following,
1) How to identify trend change and several market entry techniques to get in the trend earlier after signs of market trend change.
Disclaimer : The information presented here are for research and education purpose only, and does not constitute investment advice, trading recommendation, author shall not liable for any action taken by any individual/company with regards to the information presented here or any part of the website - https://marketcycleedge.substack.com/