NDX - The upcoming test
Updated
I have done a lot of research over this past week.
Almost everyone is extremely bearish about stocks / assets in general.
Pretty much any indicator of sentiment that you look at indicates panic. In fact, we seem to have reached a record for fear levels.
In the 2008 financial crisis, there were frequent news reports about the housing slowdown by 2006. It was a well-worn issue by 2008, but most leading economists said that the housing market didn't have to be connected to the economy or stocks.
I mention 2008 because many of those who are bearish see that we are correlated heavily to the 2008 pattern. If we are, then around next week we should see a fast, substantial decline. However, at this point in the cycle, the crisis was obvious. Banks were actually going bankrupt. Some had been losing billions since Q1 2008.
Now, if we get a special surprise report or something, this could all change, but that is true of any market.
It seems to be a foregone conclusion that we will go lower. As you can see on the chart, we have cleared the swing low from June and have held below it. There is nothing further to look at... right?
The thing is that we have not had an adequate test of this downward move. The indices are down 6 days in a row. There seems to be no upside, even intraday.
Let's think about what it could look like if we suddenly rallied 10% in a day or something like that.
It would look like an obvious double bottom pattern on any longer-term chart, like a weekly chart. Last week's bearish pin bar doesn't have any effect on this. It would also coincide with September 2020 swing lows.
On the S&P index it looks even a bit stronger because it has not fully tested the lows from several days ago.
This sort of pattern could play out if we somehow get a bullish CPI reading, and we will find out in a few hours.
I also want to mention that during economic slowdowns, like the 1970s "stagflation," stock prices do poorly. However, during just periods of high inflation, stock prices do well - and they do a little bit better, on average, to account for inflation. If we get some sort of stable, 4% inflation environment, then your money is certainly safe in the stock market.
Right now, earnings have not come down. By this point in 2008, earnings growth was already negative year on year. Earnings growth for companies has slipped, but we are not even close to negative territory yet.
Everyone is expecting further bad things. However, for anything catastrophic to happen, there has to be either:
A real crisis like 2008 / 1973
Delusion like 2000 / 1929
Since everyone is so bearish about the upcoming CPI, you can expect that even a mediocre CPI could send the markets higher, which could also trigger that pattern I outlined above. A "good" (low) CPI would probably cause some enthusiasm (though this seems unlikely with today's producer price index)
The point is that the chance of the bear market coming to an end here is much higher than people anticipate, and we should be able to find out in a bit.
However, if we just keep going lower, this will prove that the crowd is always right and you can keep on selling. Good luck!
Almost everyone is extremely bearish about stocks / assets in general.
Pretty much any indicator of sentiment that you look at indicates panic. In fact, we seem to have reached a record for fear levels.
In the 2008 financial crisis, there were frequent news reports about the housing slowdown by 2006. It was a well-worn issue by 2008, but most leading economists said that the housing market didn't have to be connected to the economy or stocks.
I mention 2008 because many of those who are bearish see that we are correlated heavily to the 2008 pattern. If we are, then around next week we should see a fast, substantial decline. However, at this point in the cycle, the crisis was obvious. Banks were actually going bankrupt. Some had been losing billions since Q1 2008.
Now, if we get a special surprise report or something, this could all change, but that is true of any market.
It seems to be a foregone conclusion that we will go lower. As you can see on the chart, we have cleared the swing low from June and have held below it. There is nothing further to look at... right?
The thing is that we have not had an adequate test of this downward move. The indices are down 6 days in a row. There seems to be no upside, even intraday.
Let's think about what it could look like if we suddenly rallied 10% in a day or something like that.
It would look like an obvious double bottom pattern on any longer-term chart, like a weekly chart. Last week's bearish pin bar doesn't have any effect on this. It would also coincide with September 2020 swing lows.
On the S&P index it looks even a bit stronger because it has not fully tested the lows from several days ago.
This sort of pattern could play out if we somehow get a bullish CPI reading, and we will find out in a few hours.
I also want to mention that during economic slowdowns, like the 1970s "stagflation," stock prices do poorly. However, during just periods of high inflation, stock prices do well - and they do a little bit better, on average, to account for inflation. If we get some sort of stable, 4% inflation environment, then your money is certainly safe in the stock market.
Right now, earnings have not come down. By this point in 2008, earnings growth was already negative year on year. Earnings growth for companies has slipped, but we are not even close to negative territory yet.
Everyone is expecting further bad things. However, for anything catastrophic to happen, there has to be either:
A real crisis like 2008 / 1973
Delusion like 2000 / 1929
Since everyone is so bearish about the upcoming CPI, you can expect that even a mediocre CPI could send the markets higher, which could also trigger that pattern I outlined above. A "good" (low) CPI would probably cause some enthusiasm (though this seems unlikely with today's producer price index)
The point is that the chance of the bear market coming to an end here is much higher than people anticipate, and we should be able to find out in a bit.
However, if we just keep going lower, this will prove that the crowd is always right and you can keep on selling. Good luck!
Note
I would describe the CPI as "mediocre," but the NDX is down 3%. Inflation went from 8.3% to 8.2% but core inflation went to a new high of 6.6% (vs. March 2022 6.5%)The pattern that I described is probably not relevant anymore. I still think that you should buy here, but now there is a little bit less proof.
A thing that I didn't mention was that a lot of the big tech names, like Microsoft, are at major support levels. They have now broken down below those areas without any sort of rally.
Note
Perhaps I was too early to comment.The current pattern would be a very bullish reversal/engulfing bar. We had a similar pattern back in February. This candle is less integrated into the chart but stronger.
This could be the stock market bottom because of the strength of the intraday swing:
2020 (bear market) ended with a +7% day
2018 (correction) ended with a +5% day
2011 (correction) ended with a +2% day, +4.5% intraday swing
2009 (bear market) ended with a +7% day
2002 (bear market) ended with a +5% day
2011/2002 seem the most relevant to me:
In 2011, we made new lows on the indices but then never saw those levels again and immediately rallied.
In 2002, the overall chart pattern looks very similar to what we have, where we sort of flattened out and then suddenly rallied.
We are back above many supports on the big tech names already & have easily rejected the lows.
We are just below the June low here. In my view, if we can close tomorrow above there (about +0.6%) then we will probably be in for a more "tradeable" and obvious breakout.
Note
This is an irrelevant and old idea, but I am bringing it back from the grave because the lows have not been tested since. Maybe it's been too high for too long and the 10,800 levels will be revisited, but because we are no longer down there it does not exactly seem that likely.
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