Market Pulse: a Key June for Markets

This month begins with events that will determine the market behavior for the rest of the year, by sure. Beforehand, historically, is the market's worst month (hence the popular saying "sell in May and go away"), however, better put the facts on a scale.

A Key June.

Positive facts: last week, the Fed put an end to the uncertainty on markets by setting the path, at least until July: rate hikes of 0.5% in June and July to reach an i-rate of 1.75-2%, with expectations at 2.5% in December. And in turn, the reduction of its balance sheet, or quantitative tightening QT, which will be proportionally slow so as not to affect the markets.

The market generally succumbs when it has uncertainty, and today it no longer has it, the panorama is defined, for this reason, this recent strong rebound in its stock and bond markets, and with the dollar weakening, another good sign. And if inflation actually reached its peak as speculated, the picture looks acceptable, but only for the short-term.

Negative facts: the "officially" confirmed recession (two consecutive quarters with negative GDP), the continuation of poor economic results (ISM, Retail, Housing) confirming the current stagflation (recession with high inflation), plus consumption that has been slowing down dangerously. And Q2 Earnings, the other great driver of the stock market, is coming soon, which will surely show the consequences of this economic environment: disappointing.

In the balance, it seems that the SP500 may do somewhat well in the short-term but in the mid-term, it could resume its bearish structure and go back to levels that allow me to rebuild my long portfolio. And I still think SP500 at 3500 (50% of its Fibonacci retracement) is an excellent level for it.

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.

1. SP500, close 4,097.00

Finally, after a brilliant bullish week (over 6%!), the SP500 closed a very volatile May, completely flat. Thanks to this, it made a break, even shallow, of its bearish structure, all justified by the reasons explained above.

Its daily chart (above) continues only for capturing swings: buying dips and mainly selling highs. Today it's back at the strong 4100 level, where needs a lot of bullish push (which by "sentiment market" seems to wane this week) to reach 4300, I think its top for the short term, as I doubt can break that structure.

And below, at 4100 there is a critical but unresolved (red) head n' shoulder pattern, and at 4000 the support of the (purple) bearish channel, and strong support, good for rebounds. And lower, the Fibonacci retracement 38.2% at 3800 and then my expected 3500, Fibonacci 50%, an excellent end level for its bearish trend.

2. Nasdaq100, close 12,549.25

The Nasdaq, continues its bearish structure but much more marked, as it's more volatile than the SP500 and more hurt by the next two rate hikes. His LH-LL formation is very clear, especially on a 4-hour chart (above), giving the feeling that its plunge still has a long way to go.

Is still moving perfectly inside its year downtrend channel, with a nice rebound last week from the 11500 level, breaking an (ocher) immediate trendline. Its price is now trying to break its structure and the 4H-MA200 at 12500, task that I see very difficult to complete, given the month of June that is coming (check below, in bonds). I keep seeing that here it's better to sell the swing highs than to buy the dips.

3. VIX, close 25.69

Volatility is the indicator that I follow the most to gauge market 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 the VIX is again at 25, a level that could not break during all of May, hence its importance now, in which is clearly a bullish double-bottom pattern.

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.

4. 10-y T-Bond, close 118'26

I believe that the key to the stock market's behavior in the short-mid term will depend on the bond market and its evolution. 

Now the Fed has today started its balance sheet reduction program (QT), cleaning up its exaggerated bond portfolio, that is, letting them mature without replacing them. Although this does not affect the price of the bonds, it does generate an illiquid and therefore volatile market. The way to attract new investors in bonds will be the increase in treasury yields. 

Needless to say, these increases will negatively influence sectors such as technology, small-caps, or real estate, and therefore the stock market in general which loves low-i rates. But, on the other hand, it is expected that in the next few months or in 2023, the recession will lower inflation (by decreasing demand) generating a rise in bonds price.

From the technical side, we have the price of the bonds, massacred for months by the rise in inflation that took it to its key support of 12 years, at 117. Is a very difficult level to break at first, but it has been trying to rebound and break structure now at the 120 level.

Fundamental vs. technical arguments, the old duel. What I see as crucial is to follow the benchmark, the 10-year bond yield (symbol $TNX), which seems to want to reach 3% again. And it's clear it should not go beyond 3.2 or 3.5% maximum, given how unmanageable the world debt would become in that case.

Good trading,

@BravoTrader

{fullWidth}