Is the bear market rally over and stocks about to reverse? Or is it just a standard, albeit quick, correction in the midst of the new uptrend?
My biggest problem with this new uptrend is simple: the Federal Reserve is still aggressive.
One of the main business rules is “don’t fight the Federal Reserve”. While it’s true that the stock market has a historical tendency to go up rather than down, rising annually about eight out of 10 years, the nuances of a bear market can be difficult to navigate.
Unlike the first quarter of 2020 or the fourth quarter of 2018, where the Fed pivoted to a more dovish and accommodative stance, Chairman Jay Powell’s Jackson Hole speech on Friday did little to indicate that the Fed is looking to ease monetary policy. and begin to provide excess liquidity.
Rather than provide liquidity, the Fed appears poised to tighten further. And that creates a problem for the stock market, particularly as we head into the notoriously volatile part of the year in September and October.
It can be dangerous to simply set the decision whether we are going to make new lows. It creates a bias that can blind us to the most obvious developments.
With that in mind, let’s take a look at how the graphics are set up.
Trade the S&P 500 with the SPY ETF
Earlier in the month, the SPDR S&P 500 ETF Trust (TO SPY) it was struggling with the $416.50 area as resistance. That zone was a significant resistance in late May and early June, after acting as support in the first quarter and early second quarter.
After the break above this zone, the SPY ran straight to the 200 day moving average, tagged it and then pulled back. Could it really be that obvious that it would recover to 200 days and vanish?
The SPY tried to recapture the 10-day and 21-day moving averages as well as the $416.50 zone, but failed last week, and Friday’s action acted as a dagger to the bulls’ hopes.
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We now have a corrective pattern within the rally. I want to see how SPY handles a test of the $396 to $400 zone. In that area, we have the 50% retracement, the 50-day moving average, and the VWAP measure anchored at the 2022 low.
In other words, this area is key. On the upside, I am looking at the $405.25 gap filling level, followed by the $410-$412 zone and the 10-day lower moving average.
If the SPY fails to hold the $396-$400 area, that is a bearish development, opening the door to previous support at $390.
Trade the Nasdaq with the QQQ ETF
The Invesco QQQ Trust Series QQQ has a very similar pattern to the SPY. But QQQ has shown a bit more weakness, which is not surprising given the technology’s greater sensitivity to interest rates.
As far as the charts are concerned, the QQQ is already testing the 50-day moving average, but the $300-$304 zone is critical.
Apart from the 50 days, the QQQ also finds the 50% retracement and the VWAP measure in this zone. A breakout of this area opens the door to $296.50, a previous resistance level. Like the SPY, this area should hold up if tested; otherwise, the QQQ risks further downside pressure.
On the upside, let’s see if QQQ can reclaim the $307.35 level, Friday’s low.
Going back above that, we could see a push towards the $312 to $313 area, where we find the 50% retracement from today’s low to Friday’s high and a previous support zone from last week.
For now, we have a correction within an uptrend, but the bears have the momentum in the short term. If that momentum picks up speed, we could see most of the recent gains, or even all of the gains, wiped out in the coming weeks.
For SPY, keep a close eye on the $396 to $400 zone, then $390. For the QQQ, look at $300 to $304, then $296.50.