Bearish technical omens for SPX, “Fear Gauge”

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With resistance overhead, the SPX has a slew of potential support areas that bears should pay attention to before they get too excited about last week’s decline.now is not a good time to chase stocks here, given potential overhead resistance and the meeting of central bankers in Jackson Hole, Wyoming this week. I wouldn’t unload the longs yet and would consider covering the longs instead, as the Cboe Market Volatility Index (VIX – 20.60) is hovering around a four-month low ahead of this potentially pivotal event. in Jackson Hole.

“…the first line of potential support was broken during Friday’s trading when the index fell back below the 4262 area…Further support is at 4230 which is a 50 retracement % of this year’s high and low and below is the 4,160-4,170 region, site of the June highs and its upward sloping 20-day moving average.If the SPX drops back below the June highs, I think now would be a good time to start reducing risk.”

– Monday Morning Outlook, August 21, 2022

After a highly anticipated Friday morning speech by Fed Chairman Jerome Powell outlining how he envisions the fight against inflation in the months ahead, the bears have taken control. For the second week in a row, stocks finished lower, with disappointments for the bulls from a technical standpoint.

For example, two weeks ago, during the standard August expiry week, the S&P 500 Index (SPX – 4,057.66) was rejected in a multi-pronged resistance zone resulting from a “call wall” linked to options at 4,300, in addition to its 200 days. moving average and the level that corresponds to the round 10% below last year’s close (4,289). At the end of this week, the index was below its first potential support level at 4,262, which was its close ahead of the first rate hike this year.

The technical environment deteriorated last week, after the SPX fell below 4,230 and the 4,160-4,170 zone, levels of potential significance as described in the second excerpt above from the commentary of last week and seen in the chart below. Additionally, last Monday morning’s gap decline produced another bearish technical omen known as the “bearish island reversal” pattern, in which the August 10 gap top was followed by the August 22 lower spread. To add insult to injury, Friday’s action can be classified as a bearish outside day, with the SPX intraday high above the previous day’s high and the near low below the low. from yesterday.

After listening to Powell’s brief speech, I think he simply reiterated what he has been saying for the past few months in terms of stamping out inflation. Stock investors may be pissed when he clarified that the Fed does not view the “neutral rate” as necessarily being a level at which the Fed halts or suspends rate hikes.

Thus, equities sold off as equity participants were likely caught off guard by the possibility of the Fed shifting from dovish to tight instead of dovish to neutral.

However, participants in fed funds futures didn’t seem as surprised, which leaves me wondering if more restrictive policy is priced into the stock market than the price action of the stock market suggested. Friday.

For example, the chart below, from the Chicago Mercantile Exchange (www.cmegroup.com), shows the likelihood of where the fed funds rate will be at the July 2023 meeting. What catches my eye is that the odds haven’t changed much from another 100 basis points of tightening by then.

Federal Funds

If much of Friday’s perceived “falconism” by Powell is mostly priced into the market, it would suggest that there is little downside left from Friday’s close. If so, I see the next level of potential support coming from the SPX’s 50-day moving average at the roughly 4,000 millennium mark.

Note in the SPX chart above that its 50-day moving average provided support for the short-term pullback in late July that followed a break above a trendline connecting lower highs from the March peak. Although this is a potential support area, bulls should not ignore the fact that risk has increased amid breakouts below the highest support level amid the “reversal” pattern. bearish island” last Monday and the bearish candlestick outside the day on Friday.

This suggests that if you haven’t covered longs as advised last week, you should lighten your longs, with the potential to lighten further if other support levels break, as illustrated by the line segments green, the horizontal lines and the 50-daily moving average in the chart above.

If hedging is still your preference, you might consider using Cboe Market Volatility Index Futures Calls (VIX—25.56). Shorter-term VIX futures are more sensitive to VIX movement, for what it’s worth.

A risk for bulls is that we are embarking on another environment in which higher volatility expectations and lower stock prices loom on the horizon. According to the VIX chart below, after volatility expectations cooled from June to mid-August, the VIX may be on the verge of “meaning” back to recent highs in 2022.

For example, the sharp return of the VIX above a trendline connecting higher lows since November, after a recent and brief dip below this trendline in early August, is alarming. Additionally, it closed above a short-term trendline connecting lower highs since late June. As long-time readers know, the VIX will sometimes pivot from round percentage levels. With that in mind, the 26 level is around 50% above the VIX’s 2021 close, and it closed just below that level on Friday.

VIX One year

Todd Salamone is senior vice president of research at Schaeffer’s Investment Research

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