As market has retest June low several times and finally close at 3584. (below June low of 3636) on 30 September. An unusual sense of trepidation of what may happen is playing through every investors’ & traders’ mind.
1) Are we closer to the final phase of capitulation? ( glass half full )
2) Or is it the start of a waterfall decline ? ( glass half empty )
Frankly speaking, nobody knows( especially in the near term ), because October is simultaneously known to be a bearish month & a bear killer month based on past market history. Therefore we need to approach October 2022 with maximum nimbleness. To quote the famous Ned Davis from NDR research: “It's ok to be wrong. It's not ok to stay wrong.”. Another quote from Charles Darwin which appropriately summarize how we should tread forward in this market. "It is not the strongest of the species that survives, not the most intelligent that survives. It is the one that is most adaptable to change." The core message in these 2 quote is flexibility ( and responding to changes accordingly )
Therefore, it’s not about how much return or fame you’ve gain in previous investing career that counts (strongest), nor is it about how many correct market call you have made in the past ( intelligence ), it’s about how you assess the shifting landscapes ( technical signal and probabilities ) and how quickly you can adjust your position. ( as well as exercising cautious risk management ).
Let’s look do a market overview before the glass half empty and glass half full arguments,
Market overview
SPX
S&P 500 close at 3584 on September 30th last Friday. Will it close below 3550( previous swing high resistance in oct 2020 turn support ) and retest 3500, hard to say at this point, interestingly 3500 level is 50% retracement from Covid low of 2190 to 4818. Below 3500, we are looking at 3200-3250 for next support level.
What would it take for me to turn bullish ( in term of S&P level ) ?
<SPX trendline & megaphone pattern>
The following hurdles need to be overcome to strengthen the end of bear market & beginning of new bull market thesis.
Hurdle level 1
Market likely need to climb above and hold 3830 after retest, the pink trendline for to overcome short term extreme bearishness, but that would still be bear market rally by some market participant standard.
Hurdle level 2
The next hurdle would be going above black trend line around 4100 to 4200
Hurdle level 2.5
After holding above black (down)trendline around 4100 to 4200, 20 days and 50days SMA should start to slope upwards and market needs to hold above 20 days MA on multiple retest attempts.
Hurdle level 3
After going above black (down)trendline, market should hold go above and hold 4325 mid August 2022 swing-high , which would mean Higher high is achieve.
Interestingly, if you connect the swing high and swing low point from May to September, you can form a megaphone pattern ( as indicated in green trendline ). If we close above the megaphone pattern upward sloping trendline ( top green trend line ), which could be around 4300-4400, we could be look at the start of new higher up leg in the market
Next, let us look at other indicator to assess waterfall decline/and end of capitulation scenario
Glass half empty ( waterfall decline ) – Bearish evidence
Bearish evidence 1 – 10 year yield
<SPX - 10 year yield>
10 year yield is too strong, it’s weighing on stock market, and future earnings are discounted more with a high 10 year yield, it needs to reverse & go down, before stock market can go up. if 10 year yield break above 4.0, probability of waterfall decline increase significantly.
Bearish evidence 2 – strong US dollar
<SPX - UUP dollar index>
Strong US dollar is a wrecking ball to risk sentiment and could potentially lower earnings as most large cap companies earnings’ are foreign currency in oversea market. If UUP break above 31 ( or 114.5 in DXY ), then probability of Waterfall decline increase significantly.
Leaning Bearish evidence 3 – SPX % of stock above 200 days MA
% of stock above 200 days MA has broken June low in SPX and NYSE ( no divergence, could potentially go down further )
If we look at long term historical chart, It’s oversold but not low enough to make a bullish base , hence leaning bearish. In 2020, 2011 and 2008 it even could go down to single digit ( circled in red )
Indecisive evidence ( either bullish or bearish, to be determined soon )
<SPX - VIX>
VIX is a having a bit indecisive consolidation after breaking out of trendline, will vix follow through by going up ( go above 33, bearish for S&P 500 ) or going down ( go below 28, bullish for SPX )
Glass half Full ( near final capitulation phase ) – Bullish evidence
Growth vs value , aggressive ( tech, consumer discretionary ) vs SPX / Staples
Currently, Growth sector ( together with technology & Consumer discretionary sector ) are still holding up even after S&P 500 has broken below 3636 ( 30th September close at 3584 ), this is an encouraging sign. We will see if this ratio can holdup in the days ahead.
Stay tune for further update, I will be adding on more bullish and bearish evidences in the days ahead.
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