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The errors made by this Fed, intentional or not, will really be historic, and today, after years of an artificially sustained rally without any embarrassment or concern, today we have a panorama that does not know how it will end.
Thanks, Fed...
Extremely volatile week in the markets. Although the weekly balance of the main indices was almost flat (SPX -0.21%), their price movements were spectacular, basically due to the current illiquid market and mainly for the Fed decision on Wednesday, and the temporary illusions (or disillusions) that usually creates Powell in the markets after his speeches.
No one doubts anymore, not even the Fed, that the US is getting closer, or is it already, to a stagflation cycle, which has the worst of both worlds: inflation and recession at the same time. Powell and the Fed seem they have already assumed it when all of Fintwit knew it since mid-2021. The economical signals were always there!, however, the Fed (and most of the world's major central banks, all aligned) continued to keep the interest rate ridiculously low with obvious rising inflation (today already at 8%, likely its peak?) and issuing money via QE, still in recent March!... absolutely unnecessary.
The bond market, a reliable market with no "noise" there, as only the smart money and institutional and no retailers move them, had already been warning problems for months, via the yield curve inversion. Other signals came from the post-COVID global supply chain crisis, the rise in oil prices, the US debt reaching $6T, etc. Nothing, everything was the same, with the money issues running and the SP500 beating record after record. "It's transitory", "inflation is not as bad", and "this time is different", they said...
Today the markets are in a clear bearish structure, which has room to continue advancing much more, given how the macroeconomy is telling us: the world environment with decreasing GDPs and weak growth data in almost all the powerful economies. Now, it's too late for shy 0.25% rate hikes: I think the Fed should bet now on quickly forcing the recession to reduce demand and thus lower inflation, via handling aggressively rate hikes until the end of the year (0.5% rise on each next FOMC meeting is the new Fed's guide, not the best but a good step) and the QT (the liquidity reduction of the balance sheet is coming strong, said Powell on Wednesday, hopefully...). Equally, isn't going to pull it off that easily: the whole cycle will take time...
Levels to watch this week
The key to a successful application of Price Action Trading is to choose the appropriate support and resistance levels and wait patiently for the price to approach or reach one of them to start making entry decisions. Let's review my technical levels for the next weeks in the main indices of Wall Street, through its index futures.
Note. As a reference, in all my daily charts you will see as indicators: the RSI (in black lines its divergences), three simple moving averages: DMA200 (wide light blue), DMA50 (skinny light blue), and a quicker DMA20 (green). And the horizontal S/R levels, trendlines, and price patterns are drawn with different colors according to their term: short-term (ocher), mid-term less than 1 year (purple), more than 1 year (red), and long-term (black). Finally, the zones are in yellow. I always use different colors for a quick review at a glance.
Historically the SP500 is having its worst YTD performance since 1970. And bonds, the traditional safe haven of markets, the same. This detail one confirms the weakness and risk of the current market.
Here I see that the best move is to sell the rises instead of buying the falls, definitively. Of course, Nasdaq can bounce: the RSI divergence is clear and is touching a 3-month downtrend line. No one can say for sure, but that will not change is its strong bearish bias. Only if it breaks the 13,560 level, breaking the structure, would it make me change my mind.
In the short-term, a rebound in its 3-month downtrend line can take it to 1950. If it does not bounce in its current level and break that trendline, it would take it directly to 1730, an important 4-year resistance (today support) from mid-2018.
It is interesting to note that since the COVID crash of 2020, the VIX average level (historically 19.5) plus its standard deviation (one and two), that is, 27.6 and 35.7, have worked very well as resistance, as seen in its daily chart. It usually makes a sharp reversal at the 35 level, which gives relief to the market, because if it clearly exceeds this, it is an indicator of a great probability of a crash.
1. SP500, close 4,110.75
The SP500 has been forming its bearish structure since the beginning of the year (almost -15%YTD) contained in the downtrend channel (in purple), with several weeks below its DMA200. In the very-short-term, it has good potential to rally from its 4100 support to 4300 resistance, supported by many pin-bars at the current level, the slight RSI bullish divergence, and the huge "buy the dip" buys from retailers this week, who are getting crazy finding the bottom of the current plunge. Seems that catching that swing move and exit at 4300 is the better play because I doubt the SP500 will have the strength to break the structure to the downtrend line at 4500. Also is shown a potential big head n' shoulder pattern from July 2020 (red neckline) that still requires a decrease in volume to be taken into account.
In the short-term, I see more declines surely to the 4000 level: at some point, it will reach it, because is clear, for me, that this isn't another pullback from the big bullish trend like in the last 10 years. There's more here.
2. Nasdaq100, close 12,663.50
With the Nasdaq, there is also a bearish structure but much more marked, as it's more volatile than the SP500 and more hurt by rate-hikes. His LH-LL formation is very clear, especially on a 4-hour chart, giving the feeling that its plunge (25% from highs) still has a long way to go, given how easily he broke through the 13,000 psychological support.
Here I see that the best move is to sell the rises instead of buying the falls, definitively. Of course, Nasdaq can bounce: the RSI divergence is clear and is touching a 3-month downtrend line. No one can say for sure, but that will not change is its strong bearish bias. Only if it breaks the 13,560 level, breaking the structure, would it make me change my mind.
3. Russell2000, close 1,833.00
The Russell2000 has shown not to have much strength since 2020, because despite having a low-interest rate as it favors its small companies, it could never definitively get out of its 2100-2360 range, for months. Its structure today is not as bearish as the Nasdaq or SP500, however, I do not see it reaching the psychological 2000 soon due to the current stagflation and strong dollar (now in a strong uptrend reaching its 5-year resistance).
In the short-term, a rebound in its 3-month downtrend line can take it to 1950. If it does not bounce in its current level and break that trendline, it would take it directly to 1730, an important 4-year resistance (today support) from mid-2018.
4. VIX, close 30.19
In periods of crazy markets like the present, volatility is the indicator that I follow the most to gauge its behavior. This is without the need to trade with VIX or VXX, which is a rather dangerous task if you do not have experience in it. Today el VIX is hovering around level 30, still not worrying.
It is interesting to note that since the COVID crash of 2020, the VIX average level (historically 19.5) plus its standard deviation (one and two), that is, 27.6 and 35.7, have worked very well as resistance, as seen in its daily chart. It usually makes a sharp reversal at the 35 level, which gives relief to the market, because if it clearly exceeds this, it is an indicator of a great probability of a crash.
5. 10-y T-Bond, close 117'210
Another key element for market analysis is the behavior of the bonds, seen through its benchmark, the 10-year bond (symbol $TNX), today above 3%.
As expected, and can be seen in the weekly price chart, inflation has literally destroyed the bonds. The fall is vertical, more than 16% from its recent maximum, an unthinkable number for bonds, never seen historically. Today its price has reached key 12-year support at $117: a perfect technical level for a rebound that would help stock markets, given that bonds usually precede stocks in their movement.
In the medium-long term, what can happen? Global debt is stratospheric and was taken on mostly at zero (or negative) interest and would become unmanageable if TNX continues to rise. This gives some hope to the markets. And it is to be expected that in the next few months or in 2023, the recession will lower inflation (by decreasing demand) generating a rise in bonds price. And by default, the market will begin to discount future rate-cuts, which will make the price of the stocks rise.
In the next post, I will show my levels for the main commodities (oil, gold, silver, copper), and cryptos (Bitcoin and Ethereum)
Good trading,
@BravoTrader
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