Which Way Will the SPX Triangle Break? Consider All the Arguments
Ever since the October 2022 lows, the S&P 500
SPX has been consolidating especially when considered on larger time frames like daily and weekly. This consolidation has formed what is known as a triangle pattern (or symmetrical triangle). A triangle is a consolidation pattern that represents equilibrium in the balance between buyers and sellers. The range narrows and price action compresses until the consolidation ends. The Primary Chart above shows the current triangle that has formed. It is essentially a collision between a 3-month uptrend and a 13-month downtrend (lasting over a year since January 2022 highs). So long as price remains in this triangle, uncertainty about the intermediate term direction will likely remain. Many triangles have arisen this year, and each one has led to new lows. This one may as well, as the yield curves and macro data support this outcome. But price could whipsaw out the top of the triangle for a month or two before heading to lows. All possibilities remain on the table. For further discussion on the details of this triangle, please refer to the linked chart and post under Supplementary Chart A below.
Supplementary Chart A
1. Arguments for Bear-Market Continuation and Further Declines to New Lows
VIX has been trending lower to new lows. But this argument cuts both ways—it lies at multi-year support as well as the support zone for this entire bear market. It’s not a spot to be complacent. On the other hand, VIX could be forming a new seasonal range lower than the past few years. The downtrend in volatility must be respected until it breaks. But the break could be vicious and fast, occurring in a matter of hours / days. For now, VIX keeps failing right at the down TL from early October 2022 peaks.
Supplementary Chart B (VIX)
Consider the orange-colored down trendline from mid-October 2022 highs. Price continues to fail at that down TL. But price is also in the yellow rectangle, which is the major support / demand zone for volatility over the entire bear market to date. The pink uptrend line is a multi-year uptrend line where VIX has found support since 2017.
SPX shows a daily bearish divergence on RSI. But no weekly divergences yet. Stochastics and another indicator (EFI) both show clear divergences on the daily. But sometimes triple divergences form. And sometimes, these divergences are erased with higher price action. Divergence create the conditions for a decline, they don’t guarantee one. And without weekly divergences yet, this minor daily divergence is too weak a signal to take to the bank.
As of the December 2022 FOMC meeting, the Fed had not paused and it had not pivoted. In fact, the Fed remained hawkish, communicating a “higher for longer” message to markets. The FOMC’s published SEP (Summary of Economic Projections) showed that rates were forecasted to peak at 5.1% (on average) which was higher than its prior rate forecast of 4.6%. The Fed’s projections also showed that it expected no rate cuts throughout 2023. In other words, higher for longer, even if rate hikes were paused.
Will the Fed’s messaging and policy from December 13, 2022, remain steadfast? If so, the markets will likely struggle to find a way higher unless they continue to completely disbelieve the Fed. Note that rate markets (and equity prices) are currently disagreeing with the Fed about rate cuts later this year. That all could change on February 1, 2023.
Money supply has continued to shrink. Tom McClellan said to financial media recently that M2SL has been shrinking while GDP has been growing, and this has never happened—the ratio of M2/GDP has never been shrinking this fast. Note that there is a lag b/w M2 changes and the effects on markets. But M2 has been shrinking for a while now. Note that when M2 rises faster than GDP, this can fuel rallies a year later, but this is the opposite of that scenario.
However, note that US Treasury Department maneuvering relating to the debt-ceiling crisis could hamper the Fed’s efforts to drain liquidity from markets. Other than its general effect on markets, this maneuvering is well beyond the scope of this article and the author’s knowledge.
Consumer spending and corporate profits cannot hold up much longer given the leading economic indicators (PMIs, ISMs, Empire State Manufacturing Index, retail sales reports from December, mortgage applications, and housing data). But equity markets don’t seem convinced. Markets can remain irrational longer than traders can remain solvent.
Gold on a ratio chart to SPX (GLD/SPX) is still outperforming. This is not an all-clear signal for equities, especially the blue-chip index of US stocks.
Supplementary Chart B (GLD/SPX)
Typically, a bear-market bottom / final low does not happen while yield curves remain inverted. One WS analyst stated unequivocally yesterday that 85% of the yield curves are currently inverted. According to that firm's indicators, if more than 55% of the yield curves are inverted, a recession always follows. But when? The timing is the tricky part especially for traders and investors. Bear markets can fool the vast majority.
The 3m/10y curve has been inverted to levels not seen since 1981. The inversion has fallen deeper into negative territory than any other inversion on the data available on TradingView’s charts. The final bear-market low typically happens after the Fed has pivoted and cut rates for some time. And remember, when the Fed cuts, it’s not because the economic outlook and corporate earnings are bright. Rather, the Fed cuts because of deteriorated economic conditions, tanking earnings and earnings estimates, horrible employment numbers (a recession).
Supplementary Chart C.1 (3m/10y)
For further discussion on the 10y/3m yield curve, see the post linked here:
Supplementary Chart C.2
Recent PMI data from SP Global was negative economically (US Manufacturing PMI at 46.7 while December was 46.2, and US Services PMI at 46.6 while December was at 44.7) though it moderated somewhat (slightly less negative) from the prior month’s data.
“The US economy started 2023 on a disappointingly soft note with business activity contracting sharply again in January. It showed subdued customer demand and impact of high inflation on client spending. January data also indicated a “faster increase in cost burdens at private sector firms. Although well below the average rise seen over the prior two years, the rate of cost inflation quickened from December and was historically elevated.”
The commentary by SP Global’s economist provided along with their recent PMI report noted that “not only has the survey indicated a downturn in economic activity at the start of the year, but the rate of input cost inflation as accelerated into the new year, linked in part to upward wage pressures, which could encourage a further aggressive tightening of Fed policy despite rising recession risks.” This suggests that even if inflation has peaked, it may not be heading to the 2% target as fast as it moved down from the peak to the current levels. And it implies that stagflation may be around the corner as economic growth slows but sticky inflation does not dissipate.
Major past selloffs in markets have been preceded by a very low unemployment (UE) rate. The rate has been as low as 3.5% recently. One analyst, Eric Johnston at Cantor Fitzgerald, noted that investors would do well by buying markets when the UE rate is 9% to 10%, and selling the market when it reaches extreme lows from 3% to 4%. UE rates haven’t begun to significantly roll over, and the Fed has remained focused on the tight labor markets and services sectors as sources of more sticky inflation. So if PMIs from January are showing wage pressures increasing somewhat, that doesn’t suggest the Fed will be *cutting* rates soon, though a pause may be discussed as rates approach 5%.
Taxes as a percentage of GDP are at the level that coincides with recessions. Taxes are 18% of GDP.
2. Arguments for a Rally That Precedes New Bear Market Lows
First, a rally that breaks the down trendline does not immediately negate the bear market. The 2000-2002 bear market experienced a substantial multi-month break of its down trendline (complete with a successful backtest after the break) before the next major leg down to new lows occured.
Supplementary Chart D (2000-2002 Example)
SPX continues to stabilize above major support / resistance zones such as 3900 and 3950. And it has closed above 4000 three consecutive days this week: January 23, 24, and 25. When it meets the down TL, it has not been reacting lower the way it has on every other test of the trendline during this bear market. It’s spending quality time with the TL, which is a new phenomenon / characteristic when price and the TL meet.
SPX continues to hold above major anchored VWAPs from August, October, and December 2022, which range from 3850 to 3900.
AAPL's price action is fairly bullish in the short-to-intermediate term. Here are the bullish technicals arising on AAPL's chart.
Supplementary Chart E.1 (AAPL's Failed Breakdown)
Supplementary Chart E.2 (AAPL's Parallel Channel Support)
NDX (Nasdaq 100) broke above its down TL (linear chart only) and has held above it as well. It also has been making higher lows since the October 2022 lows.
Supplementary Chart F.1 (NDX QQQ Log TL)
Supplementary Chart F.2 (NDX QQQ Linear TL)
IWM broke above its down TL on both log and linear charts. But it remains at critical resistance at the $188-$192 zone. It remains above intermediate term VWAPs from swing highs and lows in August, October and December 2022 (which are around $180), but it still remains below the VWAP anchored to its all-time high.
Supplementary Chart G (IWM Linear TL)
HYG broke above its down TL. Like other TL breaks, this could ultimately be a false signal, but here it has persisted for some time. HYG had a breakout above its down TL in the 2007-2009 bear market driven by the great financial crisis. This breakout was a false signal b/c the bear market was not over until early 2009, when the SPX made new lows. HYG resumed a downtrend after breaking above its down TL and went back to lows again and made lower lows, a move that coincided with SPX heading to new lows in Q1 2009. HYG shows a small bearish divergence on RSI on the daily chart. Wait for a larger bearish divergence to form on both daily and weekly charts perhaps.
VIX has been trending lower to new lows. But this argument cuts both ways—it lies at multi-year support as well as the support zone for this entire bear market. It’s not a spot to be complacent. On the other hand, VIX could be forming a new seasonal range lower than the past few years. The downtrend must be respected until it breaks. VIX keeps failing right at the down TL from early October 2022 peaks.
Consumer spending and corporate profits cannot hold up much longer given the leading economic indicators (PMIs, ISMs, Empire State Manufacturing Index, retail sales reports from December, mortgage applications, and housing data). But equity markets don’t seem convinced. Markets can remain irrational longer than traders can remain solvent.
Earnings at major publicly traded companies may not be deteriorating quickly enough to disprove the “soft-landing” narrative that pervades markets. Recession does not mean stocks go straight to lows when yield curves have inverted. Recessions take time to unfold, just as the damage to economies takes time when rates are restrictive. There is a lag.
Both FTSE and DAX have taken out the highs from mid-December 2022. FTSE is approaching multi-year highs. Both have broken above down TLs from the bear market. Both have decisively reclaimed 200-day SMAs. Both have been forming higher highs and lows
Multi-week bear-traps occur frequently where significant down trendlines are broken until the bear market resumes in earnings in a period of several weeks or months. The 2000-2002 bear market provides an excellent example of this. So a break to the upside in the triangle pattern on SPX may last for several weeks or even months before the real downside move begins. Just because it’s been challenging and choppy does not mean it won’t get worse and more trappy.
The third year of a presidential term (US markets) is nearly always bullish. There have been exceptions according to Tom McClellan (technical expert citing 1939 as an exception to this rule but noting that Hitler’s army was marching across Poland at the time). Some have said that the most bullish quarter of the presidential cycle is Q1 of the third year (technical expert Mark Newton speaking to financial media on January 24, 2022).
Breadth has been strong lately, and some technical analysts have cited “breadth-thrust” indicators as giving bullish signals.
Markets continue to disbelieve the Federal Reserve. Consider the differential b/w the Fed’s forecasts and the rate markets forecasts about whether rate cuts will happen this year, and where the terminal rate will be. So even if the Fed remains hawkish at the next meetings, perhaps it won’t matter. Markets will do what they want to do, including "fighting the Fed." You don't have to fight the Fed though or any other central bank. But don't fight the trend either.
The Fed’s messaging at the February 1, 2023 FOMC presser may be slightly more dovish, or it may be interpreted as dovish if Powell so much as mentions a pause in hikes, or that the FOMC is discussing a pause. Even if Powell remains hawkish, sometimes markets can interpret the Fed Chair’s statements (sometimes ambiguous) the wrong way—recall that this happened at the July FOMC in 2022, after which Powell cleared up the confusion at Jackson Hole in August 2022 (tanking markets immediately).
Equity positioning remains fairly underweight US equities according to financial experts on this subject. This could lead to momentum chase higher to trap all the bears before the real decline gets underway. Maybe stocks continue higher until two things occur: EPS estimates fall further, employment numbers start getting quite ugly, and the Fed is not as accomodative as it has been in past economic recessions (because while inflation has peaked, it may not fall directly to the 2% target, and with easing financial conditions, perhaps inflation could stop falling rise in Q1 2023)
Equal-weighted S&P 500 (RSP) has broken above its down TL on a daily close as of January 25, 2023.
The offense-defense ratio (consumer discretionary divided by consumer stables) RCD/RHS shows a breakout in this ratio above 8-month highs in the ratio’s value. This potentially signals near-term strength in equity markets as offensive stocks (consumer discretionary) outperform stocks defensive names (consumer staples)
________________________________________
Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
Ever since the October 2022 lows, the S&P 500
SPX has been consolidating especially when considered on larger time frames like daily and weekly. This consolidation has formed what is known as a triangle pattern (or symmetrical triangle). A triangle is a consolidation pattern that represents equilibrium in the balance between buyers and sellers. The range narrows and price action compresses until the consolidation ends. The Primary Chart above shows the current triangle that has formed. It is essentially a collision between a 3-month uptrend and a 13-month downtrend (lasting over a year since January 2022 highs). So long as price remains in this triangle, uncertainty about the intermediate term direction will likely remain. Many triangles have arisen this year, and each one has led to new lows. This one may as well, as the yield curves and macro data support this outcome. But price could whipsaw out the top of the triangle for a month or two before heading to lows. All possibilities remain on the table. For further discussion on the details of this triangle, please refer to the linked chart and post under Supplementary Chart A below.Supplementary Chart A
1. Arguments for Bear-Market Continuation and Further Declines to New Lows
VIX has been trending lower to new lows. But this argument cuts both ways—it lies at multi-year support as well as the support zone for this entire bear market. It’s not a spot to be complacent. On the other hand, VIX could be forming a new seasonal range lower than the past few years. The downtrend in volatility must be respected until it breaks. But the break could be vicious and fast, occurring in a matter of hours / days. For now, VIX keeps failing right at the down TL from early October 2022 peaks.
Supplementary Chart B (VIX)
Consider the orange-colored down trendline from mid-October 2022 highs. Price continues to fail at that down TL. But price is also in the yellow rectangle, which is the major support / demand zone for volatility over the entire bear market to date. The pink uptrend line is a multi-year uptrend line where VIX has found support since 2017.
SPX shows a daily bearish divergence on RSI. But no weekly divergences yet. Stochastics and another indicator (EFI) both show clear divergences on the daily. But sometimes triple divergences form. And sometimes, these divergences are erased with higher price action. Divergence create the conditions for a decline, they don’t guarantee one. And without weekly divergences yet, this minor daily divergence is too weak a signal to take to the bank.
As of the December 2022 FOMC meeting, the Fed had not paused and it had not pivoted. In fact, the Fed remained hawkish, communicating a “higher for longer” message to markets. The FOMC’s published SEP (Summary of Economic Projections) showed that rates were forecasted to peak at 5.1% (on average) which was higher than its prior rate forecast of 4.6%. The Fed’s projections also showed that it expected no rate cuts throughout 2023. In other words, higher for longer, even if rate hikes were paused.
Will the Fed’s messaging and policy from December 13, 2022, remain steadfast? If so, the markets will likely struggle to find a way higher unless they continue to completely disbelieve the Fed. Note that rate markets (and equity prices) are currently disagreeing with the Fed about rate cuts later this year. That all could change on February 1, 2023.
Money supply has continued to shrink. Tom McClellan said to financial media recently that M2SL has been shrinking while GDP has been growing, and this has never happened—the ratio of M2/GDP has never been shrinking this fast. Note that there is a lag b/w M2 changes and the effects on markets. But M2 has been shrinking for a while now. Note that when M2 rises faster than GDP, this can fuel rallies a year later, but this is the opposite of that scenario.
However, note that US Treasury Department maneuvering relating to the debt-ceiling crisis could hamper the Fed’s efforts to drain liquidity from markets. Other than its general effect on markets, this maneuvering is well beyond the scope of this article and the author’s knowledge.
Consumer spending and corporate profits cannot hold up much longer given the leading economic indicators (PMIs, ISMs, Empire State Manufacturing Index, retail sales reports from December, mortgage applications, and housing data). But equity markets don’t seem convinced. Markets can remain irrational longer than traders can remain solvent.
Gold on a ratio chart to SPX (GLD/SPX) is still outperforming. This is not an all-clear signal for equities, especially the blue-chip index of US stocks.
Supplementary Chart B (GLD/SPX)
Typically, a bear-market bottom / final low does not happen while yield curves remain inverted. One WS analyst stated unequivocally yesterday that 85% of the yield curves are currently inverted. According to that firm's indicators, if more than 55% of the yield curves are inverted, a recession always follows. But when? The timing is the tricky part especially for traders and investors. Bear markets can fool the vast majority.
The 3m/10y curve has been inverted to levels not seen since 1981. The inversion has fallen deeper into negative territory than any other inversion on the data available on TradingView’s charts. The final bear-market low typically happens after the Fed has pivoted and cut rates for some time. And remember, when the Fed cuts, it’s not because the economic outlook and corporate earnings are bright. Rather, the Fed cuts because of deteriorated economic conditions, tanking earnings and earnings estimates, horrible employment numbers (a recession).
Supplementary Chart C.1 (3m/10y)
For further discussion on the 10y/3m yield curve, see the post linked here:
Supplementary Chart C.2
Recent PMI data from SP Global was negative economically (US Manufacturing PMI at 46.7 while December was 46.2, and US Services PMI at 46.6 while December was at 44.7) though it moderated somewhat (slightly less negative) from the prior month’s data.
“The US economy started 2023 on a disappointingly soft note with business activity contracting sharply again in January. It showed subdued customer demand and impact of high inflation on client spending. January data also indicated a “faster increase in cost burdens at private sector firms. Although well below the average rise seen over the prior two years, the rate of cost inflation quickened from December and was historically elevated.”
The commentary by SP Global’s economist provided along with their recent PMI report noted that “not only has the survey indicated a downturn in economic activity at the start of the year, but the rate of input cost inflation as accelerated into the new year, linked in part to upward wage pressures, which could encourage a further aggressive tightening of Fed policy despite rising recession risks.” This suggests that even if inflation has peaked, it may not be heading to the 2% target as fast as it moved down from the peak to the current levels. And it implies that stagflation may be around the corner as economic growth slows but sticky inflation does not dissipate.
Major past selloffs in markets have been preceded by a very low unemployment (UE) rate. The rate has been as low as 3.5% recently. One analyst, Eric Johnston at Cantor Fitzgerald, noted that investors would do well by buying markets when the UE rate is 9% to 10%, and selling the market when it reaches extreme lows from 3% to 4%. UE rates haven’t begun to significantly roll over, and the Fed has remained focused on the tight labor markets and services sectors as sources of more sticky inflation. So if PMIs from January are showing wage pressures increasing somewhat, that doesn’t suggest the Fed will be *cutting* rates soon, though a pause may be discussed as rates approach 5%.
Taxes as a percentage of GDP are at the level that coincides with recessions. Taxes are 18% of GDP.
2. Arguments for a Rally That Precedes New Bear Market Lows
First, a rally that breaks the down trendline does not immediately negate the bear market. The 2000-2002 bear market experienced a substantial multi-month break of its down trendline (complete with a successful backtest after the break) before the next major leg down to new lows occured.
Supplementary Chart D (2000-2002 Example)
SPX continues to stabilize above major support / resistance zones such as 3900 and 3950. And it has closed above 4000 three consecutive days this week: January 23, 24, and 25. When it meets the down TL, it has not been reacting lower the way it has on every other test of the trendline during this bear market. It’s spending quality time with the TL, which is a new phenomenon / characteristic when price and the TL meet.
SPX continues to hold above major anchored VWAPs from August, October, and December 2022, which range from 3850 to 3900.
AAPL's price action is fairly bullish in the short-to-intermediate term. Here are the bullish technicals arising on AAPL's chart.
- AAPL’s daily chart shows a failed breakdown beneath major support levels over the past year. AAPL broke below $134.37 and $129.04 and fell to a new low, but quickly reclaimed $129.04 and $134.37, so this constitutes a failed breakdown. The failed breakdown is visible on the daily chart, so this is supportive of prices for several weeks to a couple months. $134.37 was the level coinciding with the lows from October 13 and November 4, 2022. $129.04 was the June 2022 low, which was undercut in December 2022 and early January 2023. Price broke below all these levels and then immediately reclaimed them.
- AAPL’s failed breakdown coincided with a tag of the parallel downtrend channel from the all-time high.
- AAPL shows positive (bullish) divergences with momentum indicators on both the daily and weekly charts.
- AAPL remains right at or slightly above the down TL from the mid-August 2022 highs, which was a fairly steep 5-month downtrend.
- AAPL remains above a short-term TL from June lows, but it also remains contained in its downtrend channel from the all-time high. AAPL is in no-man’s land, with some bullish forces that brought it here (divergences and failed breakdowns)
Supplementary Chart E.1 (AAPL's Failed Breakdown)
Supplementary Chart E.2 (AAPL's Parallel Channel Support)
NDX (Nasdaq 100) broke above its down TL (linear chart only) and has held above it as well. It also has been making higher lows since the October 2022 lows.
Supplementary Chart F.1 (NDX QQQ Log TL)
Supplementary Chart F.2 (NDX QQQ Linear TL)
IWM broke above its down TL on both log and linear charts. But it remains at critical resistance at the $188-$192 zone. It remains above intermediate term VWAPs from swing highs and lows in August, October and December 2022 (which are around $180), but it still remains below the VWAP anchored to its all-time high.
Supplementary Chart G (IWM Linear TL)
HYG broke above its down TL. Like other TL breaks, this could ultimately be a false signal, but here it has persisted for some time. HYG had a breakout above its down TL in the 2007-2009 bear market driven by the great financial crisis. This breakout was a false signal b/c the bear market was not over until early 2009, when the SPX made new lows. HYG resumed a downtrend after breaking above its down TL and went back to lows again and made lower lows, a move that coincided with SPX heading to new lows in Q1 2009. HYG shows a small bearish divergence on RSI on the daily chart. Wait for a larger bearish divergence to form on both daily and weekly charts perhaps.
VIX has been trending lower to new lows. But this argument cuts both ways—it lies at multi-year support as well as the support zone for this entire bear market. It’s not a spot to be complacent. On the other hand, VIX could be forming a new seasonal range lower than the past few years. The downtrend must be respected until it breaks. VIX keeps failing right at the down TL from early October 2022 peaks.
Consumer spending and corporate profits cannot hold up much longer given the leading economic indicators (PMIs, ISMs, Empire State Manufacturing Index, retail sales reports from December, mortgage applications, and housing data). But equity markets don’t seem convinced. Markets can remain irrational longer than traders can remain solvent.
Earnings at major publicly traded companies may not be deteriorating quickly enough to disprove the “soft-landing” narrative that pervades markets. Recession does not mean stocks go straight to lows when yield curves have inverted. Recessions take time to unfold, just as the damage to economies takes time when rates are restrictive. There is a lag.
Both FTSE and DAX have taken out the highs from mid-December 2022. FTSE is approaching multi-year highs. Both have broken above down TLs from the bear market. Both have decisively reclaimed 200-day SMAs. Both have been forming higher highs and lows
Multi-week bear-traps occur frequently where significant down trendlines are broken until the bear market resumes in earnings in a period of several weeks or months. The 2000-2002 bear market provides an excellent example of this. So a break to the upside in the triangle pattern on SPX may last for several weeks or even months before the real downside move begins. Just because it’s been challenging and choppy does not mean it won’t get worse and more trappy.
The third year of a presidential term (US markets) is nearly always bullish. There have been exceptions according to Tom McClellan (technical expert citing 1939 as an exception to this rule but noting that Hitler’s army was marching across Poland at the time). Some have said that the most bullish quarter of the presidential cycle is Q1 of the third year (technical expert Mark Newton speaking to financial media on January 24, 2022).
Breadth has been strong lately, and some technical analysts have cited “breadth-thrust” indicators as giving bullish signals.
Markets continue to disbelieve the Federal Reserve. Consider the differential b/w the Fed’s forecasts and the rate markets forecasts about whether rate cuts will happen this year, and where the terminal rate will be. So even if the Fed remains hawkish at the next meetings, perhaps it won’t matter. Markets will do what they want to do, including "fighting the Fed." You don't have to fight the Fed though or any other central bank. But don't fight the trend either.
The Fed’s messaging at the February 1, 2023 FOMC presser may be slightly more dovish, or it may be interpreted as dovish if Powell so much as mentions a pause in hikes, or that the FOMC is discussing a pause. Even if Powell remains hawkish, sometimes markets can interpret the Fed Chair’s statements (sometimes ambiguous) the wrong way—recall that this happened at the July FOMC in 2022, after which Powell cleared up the confusion at Jackson Hole in August 2022 (tanking markets immediately).
Equity positioning remains fairly underweight US equities according to financial experts on this subject. This could lead to momentum chase higher to trap all the bears before the real decline gets underway. Maybe stocks continue higher until two things occur: EPS estimates fall further, employment numbers start getting quite ugly, and the Fed is not as accomodative as it has been in past economic recessions (because while inflation has peaked, it may not fall directly to the 2% target, and with easing financial conditions, perhaps inflation could stop falling rise in Q1 2023)
Equal-weighted S&P 500 (RSP) has broken above its down TL on a daily close as of January 25, 2023.
The offense-defense ratio (consumer discretionary divided by consumer stables) RCD/RHS shows a breakout in this ratio above 8-month highs in the ratio’s value. This potentially signals near-term strength in equity markets as offensive stocks (consumer discretionary) outperform stocks defensive names (consumer staples)
________________________________________
Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
註釋
Correction: This article intended to provide arguments for a "bull trap" (coinciding with a multi-week break *above* the down TL) before the bear market resumes to lower lows. A bear trap is a fake out to the downside, and this article intended to discuss arguments for a significant rally, which would constitute a bull trap if it ended up being a fake out to the upside.註釋
SPX hit the VWAP from the all-time high and reacted lower. Keep an eye on that VWAP at 4080 or so. 註釋
It looks like the upward breakout is occurring across equity markets. Beware the FOMC meeting--markets seem to be front-running a pause. But what if a pause is discussed, but the Fed reiterates a hawkish "higher for longer" message? No one knows what will be said or how markets will interpret what is said.It's tough to be a bear so far in 2023. Still bearish longer-term, but don't like shorting blindly into a steep squeezing uptrend. Yes, it can be a bull trap. But that doesn't mean we know where it ends.
Have a good weekend.
註釋
Just measured the trendline breaks in 2002 and 2008. They both ranged from about 2.3% above the trendline to 3.4%, give or take a few basis points (because TLs aren't an exact science). So if this TL is to fail, it may do so very soon. We're already over 2% over the TL depending on where it's drawn, maybe a smidge more.Also, I noticed that the 2002 TL break was followed by a retest of the TL (several solid weeks of decline) that actually broke back below the trendline on the backtest (see blue circle below), and then SPX made a high very near the high from the initial TL breakout. So the bear market trapped bulls and bears more than once before running to lows!
註釋
Here is a more precise and detailed analysis of the 2001-2002 bear market with TL breakouts. This definitely doesn't have to play out the same way. But it shows that TL breaks are not necessarily a joyride to all-time highs like everyone already believes. To present a complete picture, though, there have been some bear markets where the TL break did lead to new all-time highs. We'll see.
註釋
This pullback makes sense this week given the bearish / negative divergences (triple in some cases) appeared on intraday charts for major US indices. The divergences also appeared on 4hr charts in the futures markets (ES / NQ) But now that the up move from last week is consolidating, those divergences' signal could now be spent. And much of what happens in the next day and a half before FOMC will be noise, not to be trusted just yet. So far it still doesn't tell us which way markets will trend after the Fed. And often, the first move (or the first two or three moves) during / after FOMC pressers are also fake outs.
註釋
If Powell talks tough tomorrow due to easing financial conditions in markets generally, don't be surprised to see a pullback to support at 3950 SPX / 395 SPY, maybe down to 3900. Watch that uptrend line from October lows. Will it get broken on a close or not? One problem—if the Fed raises 25bps, are the Fed's actions (raising much less) going to be perceived in time as speaking louder than its words (talking tough b/c of markets rallying and easing financial conditions)? If so, markets might drop on the hawkish talk, and then rally back to fill the gap at 4200.
No one knows for sure. This is just a hypothesis I'm watching as a possibility.
註釋
Fed raised its target range for the Fed Funds rate by 25 bps (quarter point) to 4.50% to 4.75%. Fed gave no indication of cutting or pausing in the statement. The statement said, "inflation has eased somewhat but remains elevated. And it said that the FOMC "anticipate that ongoing increases will be appropriate" to return inflation to their 2% target. Chair Powell will speak in about 15 minutes.註釋
On January 26 when this post was first published, SPX traded right at 4000 (4016 to be exact). This post's analysis raised the potential for an SPX rally through its down TL decisively and trap bulls in an significant move before bear market continuation. The strength of the momentum really increased after the FOMC on Feb. 1. Though no targets were set, SPX has rallied straight through its down TL resistance and nearly reached 4200 today. Other gauges of trend have more cushion than a trendline. A well known market analyst, Katie Stockton, commented recently that many other trend measures do a better job of reflecting the cushion required to account for many market participants' collective "market memory." Not everyone's memory is in the same exact level.
Though consolidation looks likely in the coming days, pullbacks at a minimum, it appears that this rally could continue to 4200 to 4250, and challenge the August 16, 2022, swing high.
Note that options dealers' hedging flows have been part of the cause of this rally. Call volume has been off the charts, which means that dealers must buy the underlying index ETFs, ES Futures, or underlying stock to hedge short call (and negative delta) positions. In addition, as puts decline in value, and as the IV falls around the "events" requiring hedging (like FOMC), the put deltas decline, and traders unload (close) puts, meaning that dealers must buy back short futures / stock hedges (for their short puts they sold to traders).
Lastly, FOMC was dovish in response to reporter questioning despite holding the line on the idea of keeping rates higher for longer. Powell had the chance to "talk markets down" and push back against the idea of loosening financial conditions. But he chose not to do so. Markets took this as a cue to rip and rally in his face.
Also it's important to note that big tech FAANG names are reporting tonight. Some are missing. This likely could spark some consolidation after exhaustion in the indices and key tech names. But it seems that into Feb. OPEX, markets remain fairly supported as long as SPX holds within the 4000 - 4150 range.
註釋
Weakness early in the week seems likely. sblk.io/2023/2/6rr3s9CdSnHzs2E.png註釋
For a while, markets strongly disagreed with the Fed's forecast in December 2022 that the Fed Funds rate (FFR) would remain above 5% for all of 2023. Now, the market is starting to agree (since the hot jobs report on Friday last wee).Here is an example showing August Fed Funds Futures, which now imply a FFR at 5.145%. A few days ago, this was quite a bit lower around 4.7% to 4.8%.
註釋
Why are markets rallying? Probably for two reasons. They have been rallying already on both bad and good news, so there is continued upward momentum. Markets will do what they want. The time has not come for the next downward trend leg to begin it would seem. It may be very close however. 4200-4300 is major major resistance, as well as gamma resistance. Gamma hedging flows by options dealers is another reason for the rally, according to experts on options hedging flows and gamma levels.
But because so much options volume has been short-dated, that rally booster may not be long lasting or available for much longer. OPEX is on February 17.
Here is a summary of some of the main points from Fed Chair Powell's speech today at the Economic Club in Washington DC. Some of the points below are quotations and paraphrases by a key Fed analyst, Nick Timiraos:
Main Points
1. Powell did not push back on financial conditions easing. This was similar to his response at the FOMC presser on February 1, 2023.
2. Powell sticks to the script, however. More rate hikes are coming. The process is taking longer than anyone anticipated
3. Nick Timiraos: “Fed Chair Powell said labor markets’ surprising strength shows why the Fed thinks it will face a longer battle to bring inflation down than many investors have been anticipating.”
Powell noted that the labor market remains extraordinarily strong. Last week’s NFP report “showed hiring accelerated in January 2023 (517K jobs added, 3.4% UE rate) and this was certainly strong—stronger than anyone expected,” said Powell. He added, “It kind of shows why we think this will be a process that takes a significant period of time.”
4. Timiraos paraphrased Powell’s points about inflation as follows: “Despite many people believing (hoping) the Fed’s recent inflation projections were too high because inflation would come down faster, the Fed didn’t see it that way, and given last week’s jobs report, still doesn’t.” Powell then said “We are going to react to the data so if we continue to get, for example, strong labor market reports, or higher inflation reports, it may well be the case that we have to do more and raise rates more than has been priced in.”
5. Powell said the 2% inflation target is not going to change. The interviewer asked again, and Powell without hesitation confirmed again, “Not going to change, no.”
註釋
Using the CME Fed watch tool, the probabilities of two more rate hikes have risen dramatically. For example, 1 month ago, the probabilities for a 25 bps (quarter percentage point) hike in both March 2023 and May 2023 was as follows:March 2023: 66.8% probability
May 2023: 37.3% probability
Now where are those probabilities for two more hikes?
March 2023: 90%
May 2023: 72%
註釋
Four days ago, the update noted that weakness was likely this week. That is happening. But it's not clear whether bears have a straight shot to 4000 SPX yet. 4084 is the VWAP from the all-time high, and SPX closed below that, which is bearish. SPX also closed below 4100 (and SPY below 410), which was the mid-December 2022 highs—so the breakout above and the failure back below could be seen as signaling lower prices. However, a bull flag and uptrend channel support still exist intact. Until the bull-flag is invalidated, and the magenta uptrend line broken, the rally can make one more leg, or at least prices can remain in the critical 4080-4200 zone.註釋
Fed Funds Futures are finally pricing in a rate path that is consistent with the FOMC’s messaging. August Fed Funds futures rates are showing a peak around 5.26% to 5.27% as a terminal rate.In December 2022, the Fed reiterated that rates would need to be higher for longer. The Fed saw a terminal rate above 5% (5.1% at the time), but markets have largely disagreed in December 2022 and January 2023. Now, this has changed. After the hot NFP print (517K jobs added and a downtick in the UE rate to 3.4%), and Powell’s interview at the Washington DC Economic Club, Fed Funds rate futures have been rising across the curve. As of Feb. 14, 2023, the Fed Funds futures show rates at the following levels in the coming months:
August 2023: 5.26%
September 2023: 5.25%
October 2023: 5.24%
December 2023: 5.115%
Note that December 2023 K peaked at 5.02 intraday on November 4, 2022, but fell well below 5% that same day by the close. It has not been above 5% since that date
Over the past 2.5 months, the lows for the December 2023 K have been from 4.30% to 4.40%. This has risen a whopping 75 bps from swing lows over the past 2-3 months! Markets are now aligned with the Fed
註釋
Fed Funds futures showing implied terminal rate in August now above 5.34%. Those bears and hawks saying that the Fed was right about rates being higher for longer are being proved right this week. It's odd how a major bond market expert a few weeks ago said to "trust the market and not the Fed." While I get this sentiment, trusting the Fed Funds rates futures market in January has been proved a disaster. Another example: Look at how the Fed Funds rate futures for the end of the year have risen over 17%:
In early January, the FF futures market saw rate cuts by the Fed throughout the year. The lows for this Dec. 2023 contract were 4.3%-4.4%. Now the December K is over 5.20%!
註釋
There are a lot of reasons to watch 3900 / 390 SPY this week. See the blue circle above. If price reverses higher, then a rally could ensue and continue into March 17 OPEX. Watch out for a bear trap below it as well, a break into 3800s, for example. In any event, keep an eye on this area as it's a backtest of the down trendline from ATHs that was broken a while back, and it's near critical Fibonacci and price support.註釋
Considering whether this may be a dip for the final relief rally before the big sell. This makes sense here. We've retested the down TL, and it seems like a decent risk-reward to consider buying the SPX here into April 2023 for a swing trade. It will continue to be choppy, so this won't be easy. But Squish sees higher SPX prices into April 2023. Longer-term bearish though. Invalidation on daily / weekly close below 3900 SPX.Wanted to publish an update quickly while prices are nearing 3900 / 390 SPY. A post takes longer to produce. ST will try to publish a more detailed article later.
註釋
Please see my most recent post on SPY / SPX for further updates:
註釋
Here is a sector relative-strength watchlist. It's not something one would watch every day, but it may help to have as a resource when you need to see how sectors are doing relative to the S&P 500 or relative to the equal-weighted S&P 500. Some of the sectors have sub-industries w/in them. Let me know if you find it useful:tradingview.com/watchlists/108842462/
SquishTrade
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