“There may be nothing extra painfully bullish than a bear market rally.”
– Dave Keller, The Closing Bar, February 24, 2022
We have been monitoring the indicators of distribution since November of final 12 months. Because the S&P 500 made new highs into December and January, the underlying situations of the market have been altering. Breadth situations began to deteriorate, with bearish divergences within the advance-decline strains. We additionally famous bearish momentum divergences because the S&P 500 was making new highs on decrease RSI readings. We even talk about the Hindenburg Omen and why the confirmed alerts in late 2021 steered a painful begin to 2022.
Now, the S&P 500 has reached its first draw back Fibonacci goal round 4200. That is the 38.2% retracement stage based mostly on the transfer from the September 2020 low and the January 2022 excessive.
When the S&P first reached the 4200 space in mid-January, we noticed a few 9% bounce from intraday low to the following swing excessive in early February. On a closing foundation, this was a few 6% upside transfer. Then, we continued the longer-term downtrend to achieve 4200 once more this week. In neither case did we really shut beneath 4200, which is a crucial knowledge level to remember!
Whereas I imagine the longer-term pattern stays decrease, and I stay satisfied that the low just isn’t but in for this down transfer, I do acknowledge that short-term energy suggests upside potential earlier than the following leg down.
So how will we play this kind of surroundings? Truthfully, the reply to that query very a lot is dependent upon your time-frame. For those who’re a medium to long-term investor, as I’m, then my Market Development Mannequin stays bearish, which signifies that we stay a risk-off surroundings till confirmed in any other case. That leads me to the latter half of this week as a countertrend transfer, a.okay.a. a bear market rally. Bear market rallies are usually tremendous fast, tremendous highly effective and tremendous seductive.
So how will we differentiate a bear market rally from a real market backside? 4 issues come to thoughts…
- A better low. A downtrend is a sequence of decrease lows and decrease highs. An uptrend is a sequence of upper highs and better lows. How can we verify a rotation from a bear market part to a bull market part on any time-frame? You want the next low.
- Enchancment in breadth situations. Breadth has been deteriorating, with the cumulative advance-decline line for the NYSE undercutting its low from 4th quarter 2021. The A-D strains turning greater would point out that particular person names are bouncing sufficient to substantiate a brand new uptrend.
- Enchancment in worth momentum. The S&P noticed its RSI slope steadily decrease because it made new highs in December and January (see the S&P 500 chart above). That downtrend in momentum continued as the worth transfer decrease during the last six weeks. I would wish to see the RSI break above trendline resistance, then proceed above a stage of 60, earlier than I’d imagine any kind of important uptrend is in place.
- Value break above resistance. Because the market bounces greater, we now want to contemplate potential resistance ranges. An uptrend with endurance must push above established resistance ranges to substantiate that purchasing energy is sufficient to overwhelm any potential promoting strain. The 200-day transferring common present sits round 4460, and the earlier swing excessive is true at 4600. If and when the S&P breaks above 4600, you’ll hear my voice turn into a lot much less cautious and way more “lengthy and powerful” because the all-time highs round 4800 can be way more attainable.
Now what about leveraged ETFs? When the market strikes decrease, I am usually requested about inverse ETFs and their cousins, the leveraged inverse ETFs. Do these automobiles make sense for short-term merchants? Completely. Really, that’s for whom they have been created! Inverse ETFs have been designed to trace the inverse each day returns of the underlying index. So if the QQQ is up 1% at this time, the PSQ can be down proper round 1%. The leveraged varieties merely observe 2x or 3x of that each day return.
Here is a chart of the QQQ together with the 2x and 3x leveraged lengthy ETFs, together with the inverse 1x, 2x and 3x leveraged ETFs.
Ought to they be utilized by long-term buyers? Sure, for those who perceive the dangers which might be embedded within the construction of the person merchandise!
My newest YouTube video breaks down a number of the dangers concerned and the way long-term buyers can use these inverse and leveraged merchandise!
RR#6,
Dave
David Keller, CMT
Chief Market Strategist
StockCharts.com
Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your individual private and monetary scenario, or with out consulting a monetary skilled.
The creator doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the creator, and don’t in any approach characterize the views or opinions of some other individual or entity.
David Keller, CMT is Chief Market Strategist at StockCharts.com, the place he helps buyers reduce behavioral biases by means of technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness methods to investor choice making in his weblog, The Conscious Investor.
David can be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency targeted on managing threat by means of market consciousness. He combines the strengths of technical evaluation, behavioral finance, and knowledge visualization to establish funding alternatives and enrich relationships between advisors and shoppers.
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