Backdrop
If you’ve been in the market for at least the past year you will know that the narrative has been dominated by inflation, interest rates and recession. Referring back to my previous market article, I presented reasons as to why the market may be due another leg down. Possibly a large one.
In this article I will look at the evidence to identify whether the move down is invalidated and crucially, if this move higher is the real deal.
Where is the market?
The S&P has been in a downward channel for just over a year. With each corrective down we’ve seen intermittent price reversion upwards before rejecting at the diagonal resistance. At the time of publication, the price has pushed just beyond the upper diagonal resistance. The key here is for the market to determine whether it will consolidate above or once again reject back down below.
This price action is decisive. The reaction here will set the tone for the foreseeable future.
From a purely technical analysis point of view, I’m looking for the market to react as follows to position myself either way:
Bullish
Resistance is broken and successfully held by close of this week [27th Jan]
A period of consolidation above resistance and a re-test down to form a support level.
Resistance successfully flipped into support* followed by price expansion.
*Not Financial Advice: Resistance flipping support and holding that price level creates a strong BUY signal.
The bullish case has plenty of ammo to back up the price action.
RSI shows a bullish divergence.
Inflation dropping —> Interest Rate softening.
The Fed aiming to avoid recession with a “soft landing”.
Bearish
Price retraces and closes the week below resistance [This would be extremely bearish].
Failure to consolidate above resistance and establish a new support.
Price reacts negatively when the 21EMA [Green line] tries to cross the 89EMA [Blue line]. [This is key to my thesis. You can read about it here.]
The bear case also has ammo.
Increased staff layoffs: Spotify following, Microsoft, Tesla, Facebook, Twitter, Amazon etc..
Drop in economic demand seen at transport level.
Despite dropping, inflation is still high!
The drop from ATH to bottom of this cycle is ‘only’ 26%. Enough to be a bear market but does it reflect the real economy?
Conclusion
So is the move down invalidated? Are we in a bull market?
Well, this is the best “bear market rally” we’ve seen during the market correction. There are considerable reasons to be bullish here and should the market consolidate above resistance over the coming weeks we may be on the precipice of another bull market. At the moment, the market is calling the Fed’s bluff. Whether the market follows through is yet to be seen.
What we can be sure of though, is that this is a critical time for the market.
Will it be the bulls or the bears walking off smiling into the sunset?
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