25092022 market review : are bears out in full force ?
Are bears out in full force ? ( unequivocally yes, unless you have living under the rock). The core question is, are they getting started, at the beginning of their feast ? or are they close to finish mauling ? To answer this question, we will need to look at price, breadth, sentiment, asset class relative performance, to assess the probability in each of the following cases.
1) Further breakdown of 6 – 10% ( which would drop as low as 3270, 10% from 3636 )
2) minor breakdown of 3-5% ( which could go as low as 3450, 5% from 3636 )
3) False breakdown of 1-2%, ( aka fakeout, a fall to range between 3560 – 3600 , and then rally back up )
Before I begin, I want to emphasize again that this week ( Sept 26th - Sept 30th) is expected to be bearish as 2nd half of September is a seasonally weak period, ( possibly up to 2nd week of October ), Because Institutions are adjusting their portfolio ( dumping bad positions)
Section A) Price
<SPX>
S&P 500 next support level can be found between 3550 – 3588 ( 2 swing high in sept & oct 2021)
Section B) Breadth
The breadth is decidedly bearish, I will be looking a the following 2 charts
1) Up/down volume ratio , and Dvol/Uvol % day
2) % of stock above 200MA
<SPX – NYSE Up / Down Volume>
DVOL/UVOL ratio has been in excess of 8,9 recently and 18 post CPI release. We also had 90% Down volume on Sept 13 and Sept 25, and multiple 80% down volume day these 2 weeks. All these are decidedly bearish breadth readings.
In the coming session, I will be looking at the potential occurence of high up/down volume ratio, 90% up volume day, specifically speaking,
1) where DVOL/UVOL > 11 was followed subseqeuently by high UVOL/DVOL ratio in excess of 9 ( preferably above 11 )
2) 90% Down volume day was follow subsequently by 90% upvolume day. ( back to back 80% upvolume day )
The occurrence of these 2 signal normally happen around areas of market bottom because panic selling and panic buying are 2 powerful psychologically driven activities in times of extreme market panic ( thus market bottom )
<% of stock above 200MA>
as S&P goes below is making a new lower low below June low of 3636 In the days ahead , I will be looking at
1) % of SPX stock above 200MA , does it or does it not breach 12.80% ( if it does not breach 12.8%, we would be looking at a divergence which could POSSIBLY indicate market bottom )
2) % of Nasdaq stock above 200MA, does it or does it not breach 9.20% ( if it does not breach 9.2% , we would be looking at a divergence which could POSSIBLY indicate market bottom )
Note the word POSSIBLY, it can increase probability of market bottom, but is not a certainty.
Amidst all this bearish reading, it’s also getting to the staged of it’s so freaking bad, it’s good.
Together with the extreme bearish sentiment in the next section, we are getting closer to the end of capitulation and could be gearing up for a reversal.
Section C) Sentiment
All the sentiment reading is getting to very extreme, in particular retail side,
<<AAII survey>>
AAII survey is getting to extreme level, which could indicate some reversal ahead.
<<VIX - SPX>>
Amidst all the panic recently VIX seems to be relatively tame, you would expect it to be above 35 minimally, but it currently does not as the SPX is falling closer towards June low of 3636. A closer look shows that the VIX is contained within a larger trend line ( drawn in red line )
If VIX close below 33 which SPX is below 3636, then we could be looking at a divergence.
Section D) asset class relative performance
Looking at the QQQ/SPX , XLY/SPY, XLY/XLP , growth vs value ( across large , mid, small cap ) the ratios have not broken down below June low as SPX is close to testing June low of 3636.
Sector RRG graph
2 notable observation as market is tanking towards 3636,
1) technology sector (XLK) is gaining momentum and moving into improving quadrant.
2) consumer discretionary (XLY) is still inside leading quadrant even though it has lost momentum recently ( as indicated by the tail travelling downwards )
In the days ahead, I will see if XLK and XLY stay in Leading quadrant, as market bottom & reverse. ( without defensive sectors XLU, XLV, XLRE staying in leading quadrant ) This will indicate a reversal that are substantial.
Of course, all the above analysis are still heavily conditional upon CPI reading, if we get a bad CPI reading, a much lower low beckons; if we get a good CPI reading ( moderate or lower CPI ) then we are closer to the bottom.
So based on above observations so far, here’s my probability score for each scenario below ( with the condition that October CPI moderate further and does not scare the hell out of everyone )
if October CPI reading is good,
Scenario 1 : Further breakdown of 6 – 10% ( which would drop as low as 3270, 10% from 3636 ) = 20% probability
Scenario 2: minor breakdown of 3-5% ( which could go as low as 3450, 5% from 3636 ) = 35% probability
Scenario 3: False breakdown of 1-2%, ( aka fakeout, a fall to range between 3560 – 3600 , and then rally back up ) = 45% probability
if October CPI reading is bad,
Scenario 1: 45% probability
Scenario 2: 40% probability
Scenario 3: 15% probability
Stay tune for further update.
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