Market Updates

Zig Zag and Cycles

The chart below is a weekly chart of the S&P 500 Index ETF, “SPY.” Since last October the market has been in a zig-zag pattern indicated by the black line over the weekly price bars. From Investopedia: “The Zig Zag indicator does not predict future trends; it helps to identify potential support and resistance zones between plotted swing highs and swing lows”. Unfortunately, the “SPY” has made lower swing lows since October. For the last 3-weeks the S&P 500 has been trending up, and the market has continued to rise since the FOMC meeting on July 27th. For the market to continue to show any meaningful strength it must break through the resistance line indicated on the chart. If it can break higher it would be reassuring if volume increased too.

July 11, 2022 The Chart above is the S&P 500 exchange-traded fund, “SPY” year-to-date. It is easy to see the downtrend the market has been in for the last 6 months. I have marked the four FOMC meetings that the Fed had this year. The next meeting announcement will...

What is the Market looking for? Capitulation. Capitulation means surrender. In financial markets capitulation happens when a significant proportion of investors succumb to fear and sell over a short period of time, causing the price of a market to drop sharply amid high trading volume. This usually puts the market in a very oversold position and encourages long-term money managers to step back in.

The S&P Index is approximately 16% lower from January 1st. It is now in a downward sloping channel. The last four times the market has approached this area it has had a bounce higher. The indicators we use are giving us oversold signals, expecting a bounce, but the news and the rising interest rates continue to put pressure on the markets.

Year to date the S&P 500 index which is tracked by the symbol “SPY” is near the middle of a channel since January 1st. As indicated on the chart below, the blue line is the 200-day moving average and the red line is the 50-day moving average. Between January 24th and March 21st, the SPY traded most of this time below the 200-day moving average and the 50-day moving average. Also, as of March 14th the 50-day moving average has crossed below the 200-day moving average, another sign of weakness.

Since the beginning of this year the S&P 500 has declined almost 15%. A bear market is when a market experiences prolonged price declines when securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. Very few people are saying we are in a bear market but with the Russian Invasion and rising inflation we are not far off.

We had a 10% correction in September 2021, which lasted a month before turning back up until the end of the year. The correction this past month has been sharper and deeper than September’s correction. Notice on the chart that the Nasdaq 100 is trading in the same price range as it was in September.

Last month’s newsletter I mentioned that it looked like the market would have support at the 380 level, which it found on December 20 then bounced up to a resistance level near 400. That move looked constructive and encouraging. Unfortunately, as the new year began interest rates spiked up and caused fear of the Federal Reserve’s pending rate hikes driving the market down.

After the 10% correction in the month of September the market has rallied back but without much progress higher.  Also notice the up and down “choppy” action since November 1st.  News events such as the coronavirus Omicron variant, imposed international travel restrictions, and the concerns over inflation have shaken the markets.

In last month’s September newsletter, I mentioned “the indicators that I rely on – are indicating declining market strength.” So, for the month of September the Nasdaq 100 ETF, symbol QQQ, declined a bit over 9% from the high on 9/7, at 382.78, to the low it hit on 10/4, at 350.32. Since the 10/4 low the market has risen 2.8%. Again, I see no need to panic over a 9% correction for the market highs, but I still think there is some need to be cautious in this market.