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Thursday, August 18, 2022

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End of the Bull: Primary Trend Shifts as Markets Shatter

Courtesy of Fibozachi.com

While technical analysts and traders have numerous techniques for determining trends, the most basic method is the tracking of higher highs and higher lows (bullish trends), or lower highs and lower lows (bearish trends).  Tuesday’s relentless sell-off across US equity markets marked an undeniable end to the continuous series of higher lows that had been intact since July 2009.  With Tuesday’s close below 1,044.50 on the S&P 500 Cash, ‘bulltards‘ can no longer claim that the primary trend of equities remains bullish.

Traders are going to have their work cut out for them in the days and weeks ahead as a plethora of support levels remain scattered between the levels of 950 – 1,030.  Though equities appear poised for downside acceleration into Q3, remaining short may prove difficult in days ahead for most as increased volatility, erratic HFT algos and near-record market internal readings combine to create yo-yo-like equity markets.  Tuesday’s Advance / Decline line for the S&P 500 clocked in at -498, with only Zimmer Holdings (ZMH) closing higher.  As a company that designs, develops, manufactures and markets orthopaedic reconstructive implants, dental implants, spinal implants, trauma products and related surgical products … could GETCO be anticipating a large order from Mr. Market for a new hip?

Joking aside, what can we expect after such an all-encompassing technical rout?  There are essentially two ways to interpret such overwhelmingly positive / negative market internal readings: temporary exhaustion and inflection or breakaway continuation.  Normally, when US equity markets exhibit an opening dislocation (greater than +/- 1.5%) and an extreme trend day (greater than 90% A/D, VOLD, etc.) there tends to be an immediate reflex so as to offset lopsided internal measures of momentum.  And though the majority of such dislocationary instances immediately resolve themselves in the opposite price direction, the possibility of witnessing a breakaway continuation to the downside here looms large.

The only other modern instance of a -498 Advance / Decline reading on the S&P 500 occurred on September 29, 2008.  Equity markets had effectively crashed before 9/29/08 saw an -8.83% swoon; the next day closed 60 points higher, retracing 63.08% of that loss before an eight day waterfall drop shed almost another 28% off the index.  Though the technical posture of the S&P is much different today than that of late-September ’08, behavioral similarities do exist.  And while a 1.8% – 2.2% reflexive bounce would be the historical norm, such a move would likely prove to be little more than a dead cat bounce before the next support shelf that spans 980 / 950 is tested.   Add the positive seasonality of July 4th into the mix and the next few sessions are shaping up to be very, very interesting for price action across a short-term sold-out S & black-eyed P 500.  With short covers, HFT algos and the handful of remaining human prop traders the only ones possibly interested in renting longs into the weekend, there is not a compelling reason to look long until at least after a baby bounce and an explicit failed new low develops.  From our perspective, the only decent setups over the next few days would be to either re-short a bounce around 1057 on the cash or to simply wait for an explicit failed new low to develop in order to play a follow-through bounce.  For most traders and technicians actively gauging the market’s reflexive reaction over the course of the next session or two, the most prudent course of action is to sit on one’s hands until a clean setup presents itself. 

NYSE Up & Down Volume

NYSE UVOL vs DVOL

 

NYSE Up – Down Volume Differential

NYSE VOLD

 

Advance / Decline Lines of the 7 Major US Equity Indexes

ADV/DECL

 

Relative Percent Change of the S&P 500, NASDAQ & DJ-30 since 4/23/10

Percent Change

 

S&P 500 Futures – Daily

ES Daily

 

S&P 500 Cash Index – Daily

INX Daily

 

S&P 500 Cash Index – 50% Retracement & Swoon

INX Retracements

 

S&P 500 Cash Index – Remaining Support Shelves

INX Targets

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Good stuff-

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