SPX Downtrend Intact But Short-Term Relief Rally Likely

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Primary Chart: Primary Down Trendline, Fibonacci Levels, Two Key Anchored VWAPs

SUMMARY

SPX's downtrend in 2022 was never invalidated. It remains effective at the start of 2023. Downward forward earnings revisions combined with a challenging macro environment (recession along with tight central bank policies in the US, UK and EU and elsewhere) will continue to pressure prices lower in the intermediate term and perhaps even the longer term until central banks begin to pivot away from restrictive policies. Falling money supply (the result of central bank policies) should also continue to be a headwind.
Although the downtrend remains intact and likely to continue, a relief bounce looks likely in the short term. The Bollinger Bands (%B) provides a short-term positive signal. And price action closed with strength on Friday, December 30, 2022. One caveat is that many strong closes in this downtrend have been followed by sudden and unexpected downdrafts. Caution is warranted.
The first target is 3864-3870 SPX. The second target, which will only be valid and effective if the first target is captured and held on a close, is $3887-3893 (3900). The third target is 3916-3932. The final target is 3972, where a gap fill area coincides with the .618 retracement of the decline from mid-December 2022 peaks.
AAPL's reclaiming of a key level, after an extremely bearish final quarter of the year, supports a short-term relief bounce.

The S&P 500 saw a sustained downtrend in 2022, which started on January 4, 2022 and continued into year end. This downtrend remains in effect and intact going into 2023. The macro environment continues to be problematic, though inflation does appear to have peaked at least in the US. Regardless of whether inflation has peaked, the most important question remains whether inflation will continue its decline to the Federal Reserve's 2% target or whether sticky components will interfere.

Meanwhile, corporate earnings appear to be falling whilst central banks (especially in the US and EU) remain committed to keeping monetary policy tight. In mid-December 2022, recall that Christine Lagarde, ECB President, said definitively that the ECB is not pivoting, not backing down in maintaining its tighter policy. Many more hikes lay in store, especially given that the ECB remains behind the US to some extent. The US is already at a Fed Funds target rate of 4.25% to 4.50% while the ECB's target rate remains around 2%.

Continued tight policy in the US and abroad should likely cause forward earnings to continue to decline. The focus may likely shift from inflation toward growth / recessionary concerns. Inflation will still be a major issue, however, and sticky inflationary components may support central banks remaining tight for longer than expected, which in turn will influence growth / recessionary concerns. So downward earnings revisions / recession may be the catalyst for equity markets to see further downside in 2023. Interest rates remaining higher for longer may be the reason for a lower SPX multiple. Some financial experts have stated that markets tend to bottom when SPX's PE is around a 13-15 multiple. SPX is currently around 17-18x SPX forward earnings of about $230 (approximate figures used given that SquishTrade does not focus on fundamentals but technicals).

In the very short term, however, markets appear primed for a countertrend bounce. Markets spent the final trading days of the year chopping around the 3800 SPX level, where a massive JPMorgan hedging position (an options collar) had a short call strike just above this level (3835) with about 45,000 contracts on SPX (each with a multiplier of 100). That collar's expiry was December 30, 2022. So it has now expired and should no longer pin markets around this level, though a new one has been or will soon be established via a roll or outright (this is a quarterly phenomenon). Key price movements on December 30, 2022, as well as other technical evidence, supports a countertrend bounce.

But substantial resistance lies overhead. VWAPs, Fibonacci levels, and overhead supply zones all will make it more difficult for price to rise in an unfettered manner into the new year. However, a series of potential targets will be identified below. Each subsequent target, as usual, depends on the prior target being captured and held on a close. Furthermore, the reasoning for why a bounce may be imminent will be discussed through charts and technical analysis below.

Note that just because a bounce may occur does not mean it is time to load the boat long: countertrend bounces can fail at any time, being swept away by the larger degree tide of a primary downtrend. Such bounces require traders who participate to be nimble and flexible, and they only work when traders manage risk extremely well. The alternative for traders is to stand aside and wait until the short-term trend re-aligns with the longer-term trend. SquishTrade has found that standing aside often works better than trying to trade every countertrend move followed by trades where trends on all time frames align. Traders may find that it helps to free up both mental and financial capital to prepare for the bigger, better moves where trends align on multiple time frames.

The supplementary charts and analyses below support the main technical viewpoints discussed.

1. The primary downtrend remains intact and is likely to continue. It can resume at any time, and it seems likely that it will lead to new lows in 2023. But it's better to take price action level to level rather than blindly assuming new lows are destined to occur.
Supplementary Chart A

2. A short-term relief bounce appears likely, however, that may give shorts an opportunity to establish bearish positions in anticipation that the decline will resume.

Consider the W bottom appearing on the Bollinger Bands, as evidenced by the %B indicator, which reflects this pattern well.

Supplementary Chart B.1

Consider the way price closed on December 30, 2022, the final trading day of 2022. Price fell dramatically from December 12-13, 2022, after the FOMC meeting that week. But price stopped falling right around the 50% Fibonacci retracement level (shown below) near 3800 (3796), which is the 50% retracement of the entire rally from the mid-October 2022 lows to the mid-December 2022 peaks. Then, after chopping in a range for nearly two weeks (9 trading sessions), SPX pushed back above it's short-term VWAP in the final minutes of trading on December 30, 2022 and back above a key short-term EMA. Of course, this could all change on January 3, 2022, and the chop could continue the way it has for the past two weeks. But daily and weekly closes can be important.

Supplementary Chart B.2

3. AAPL's price action, while bearish, suggests a *short-term* relief bounce as well. AAPL, the most heavily weighted stock in the SPX and the NDX, saw very bearish price action in December 2022. It not only undercut prior lows from October and November 2022, it also finally undercut its June 2022 low at $129.04. And it made new lows around $125.87. Consider the yellow circle for a moment—notice how AAPL undercut its 2020 Covid-low VWAP (pink) as well as the June 2022 low support area only to reclaim this key zone the next two days. This recapture of a key level, this failed breakdown, suggests at least some limited further upside. Watch out for the major resistance areas above, however! And the new lows on daily and weekly charts (under June lows) do not suggest AAPL is about to resume a new uptrend back to all-time highs. Rather, they suggest further downside ahead.

Supplementary Chart C

4. A variety of anchored VWAPs from major swing highs and lows from 2022 suggest that the downtrend remains intact into 2023 but that a relief bounce could occur in the coming weeks. Notice how the VWAPs all lie overhead in a bearish position. But the slope for the June, August, October and December VWAPs has moderated a bit, flattening out and suggesting that price may rise to test them soon. Even if price breaks above them temporarily, watch for a breakout above them that ultimately fails.

Supplementary Chart D

5. A series of plausible price targets for a relief bounce is presented. Remember that SquishTrade presents targets as conditions precedent to each other. So Target 2 will not be viable or valid unless and until Target 1 is captured and held on at least an hourly (preferably daily) close.

Supplementary Chart E

Thanks for reading. Happy New Year!

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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.

ノート

The first target was hit, but only very briefly. The first target was given as 3864-3870 SPX. Price popped early in the trading session to 3878. But then price fell and gave back nearly all of its gains. But it is holding at the support of a triangle / pennant -- the lower boundary is an uptrend line from 12/22/22 to present.

One of the primary reasons for a short-term relief rally was AAPL. But this reason may now be eliminated. Last week, AAPL had shown a failed breakdown as of Friday's close 12/30/22 by reclaiming a key level (shown above as Supplementary Chart C. Now AAPL has broken down again back below that key level and made a new low in its downtrend. Today's low so far is $124.19, which undercut AAPL's 2022 low of 125.87 made on December 28, 2022.

ノート

It looks like SPX wants to push higher the next couple of days. A couple reasons I'm thinking this:

1. VIX is failing at its down TL (yes, debate whether TA should be applied to VIX, but it can work sometimes).

2. SPX continues to respect its parallel uptrend channel. Bears will quickly point out that this is looking like a bear flag. Couldn't agree more! Unless mid-December highs are taken out (unlikely), this flag / channel will eventually lead to more downside. Perhaps the devious nature of recent markets will require an exhaustion move higher into 3900-4000 (breaking the top of the flag) before the next leg down, who knows for sure. Level by level is how to take this

トレード終了: 利益確定目標に到達

The first target of 3864-3870 SPX was hit very briefly on January 3. Price popped early in the trading session to 3878. This was not much of an upside move, but it was a directional move in the direction that the analysis described, i.e., a bear relief bounce.
But then price fell and gave back nearly all of its gains, and never held the first level. This is a sort of failed breakout. Price continues to remain weak. But price also remains within the triangle and parallel channel (bear flag). When the bear flag breaks decisively, the next bear move is underway. Although price could rally on a "bad" NFP number tomorrow (the Fed doesn't like the tight labor market), a strong or decent NFP number may start the next trend leg. Or the chop will continue until CPI, we'll see. Regardless, R/R for upside does not look great at this time. Price action remains weak, and the path of least resistance remains down (despite any bounces that may occur in the coming days)

ノート

This hedge-fund manager's view on forecasting and making money is very refreshing. Certainly, he works to ensure excellent entry points. But no need to be in the business of predicting. Make money when the trends are down! Check it out! youtube.com/watch?v=7hkpZDL4vEs

トレード稼働中

Price just hit the second target zone (3887-3893 SPX) and is closing in on 3900 SPX. The update yesterday prematurely closed this idea; however, yesterday's update queried whether price could rally on a "bad" NFP number. The rally came even though the number wasn't that bad. The rate of increase in wage growth m/m was lower than expected, so the algos are buying and shorts are covering.
The weak and devious price action yesterday -- pushing repeatedly downward at the edge of the bear flag channel and failing at mild levels of resistance -- was a fake out, and it was the reason the idea was prematurely closed after hitting only the lowest target listed for a bear bounce. It doesn't make sense to play long into a binary economic data drop when price is pressing on the lower edge of a bear flag channel. Sometimes TA doesn't quite work -- is it the market makers or the algos or both who mess this up sometimes?

It's quite possible that the original idea can go to 3900-3916 SPX (Target 3) if target 2 holds.

ノート

Here is an example of how devious the move yesterday was in light of the breakout to the upside today. Look how that triangle in NQ futures broke down, signaling the next bear move would be underway in major indices. And then, it was a complete bear trap despite multiple hourly closes well outside the lower edge of the triangle. ES futures didn't break down the same way, but it came close and put its "toes over the line"

ノート

Here is a daily chart of SPX. The magenta uptrend line from October 13, 2022 lows has continued to be respected. It's better not to fight that uptrend line until it breaks.

But the primary downtrend line lies overhead near 4000 depending on what day is considered (it slopes down so the numbers decrease over time).

Price may pullback to test all the key near-term VWAPs before pushing a bit higher into 3900, 3950, the gap fill area (blue rectangle) around 3963, the .618 retracement of the recent decline from mid-December peaks at 3972, the 200-day MA (pink) around 3990, and 4000. Evaluate the price action level to level. If 3850 holds early next week, then 3900 is next.

トレード終了: 利益確定目標に到達

Summary: Target 3 for the "relief bounce" mentioned in the original post has been achieved at 3916-3932. But price action looked ugly at the close.

This post was originally published December 31, 2022. Target 1 was listed as 3864-3870. Price hit an intraday high of 3878 on January 3, 2023, the first day of trading this year, but quickly fell back below the level and hit the bottom of the channel.

Target 2 was at 3887-3893 (3900), and this target was satisfied on Friday with an intraday high of 3906, and the close held above this zone.

Target 3 was 3916-3932 zone. That was reached today, though the close looked a little ugly. The intraday high was around 3950.

Target 4 is 3972 at the .618 R of the decline from December 12 highs

This is a tricky spot. If Powell waves his arms hawkishly tomorrow, watch out below. But CPI may come in cooler later this week, and give market participants more hope to push prices higher and cause more shorts to cover. It is okay for traders and market participants to step aside. One commenter yesterday implied that traders must always pick a side. That's not likely correct. There are many times when it's no longer wise to trade or attempt to call the higher probability price path. On this note, one of the best traders ever (in my opinion), Amrit Sall, appearing in the book Unknown Market Wizards by Jack Schwager, spoke often of the vital skill of "doing nothing" in between the outstanding trades. He described this in an interview as being like music, which is the "space between the notes." Music doesn't work if there is no space. Sall said to Schwager that he always asks himself "am I wasting my financial capital and mental capital on subpar trades instead of waiting patiently for the real trade opportunities?" He wrote that 90% of the time, market will not provide a setup / opportunity, and 10% of the time he made 90% of his profits. Another great point is to stay in a calm state of flow -- where the trader is not trying to force anything, trader has no attachment to the position and can cut losses without hesitation.

SquishTrade is content to call this one a win with 3/4 targets hit, albeit in choppy, whipsawing action.