SPX outlook Q1-2023
Updated
The first quarter of 2023 looks less bearish at this moment. Allow me to walk you through what I see and how I come to my conclusion.
1. There is a clear downward trend channel that started on the 4th of January 2022. That is a one-year long bearish trend. When I see such trend channels, I look for signs to see whether the trend is strengthening or weakening.
2. One of those signs is the 200-day moving average, shown here as the blue line. In a strong trend you'll see the gap between price and the blue line widening, while the opposite indicates a reverse to the mean. A hard rejection after a test of the 200DMA is usually a bearish sign, while a weaker rejection is a les bullish sign. In this case, we can spot that the rejections are getting less powerful, or the dips are at least ending more quickly. This is a mildly bullish sign.
3. There's two scenarios here. One starts with a break of the key 3900 level, which would trigger my bullish case with a breakout towards 4410. The bearish case requires a break of the 3790 level which would bring me to 3480. As you may see from the attached chart, there is a lot of symmetry in the moves and once you find the horizontal centers of the moves, you'll start noticing that tops and bottoms are quite predictable.
4. Cyclicality is also worth noticing. The time frame between the first and second low was approximately four months. The same applies to the time between the tops (3.5 to 4.5 months). The significantly lower high is like a break in the cycle and signals that volatility is reducing. This could very well be a sign of an upcoming trend change. If we defend 3790, the cycle will be disrupted and we should see the recent lows as cycle lows, which would bring us to a high of 4410 as discussed earlier. Time frame would be mid- to end-Feb. If however we break 3790, we should see a test of 3690 which then becomes the horizontal center of the cycle, with a target cycle low of 3280, possibly in the first half of February. The reduced volatility would have then been followed by a return to high volatility. Side note: the level of 3480 has been drawn as possible intermediate support.
Conclusion: base scenario is bullish due to a weak rejection from the 200-day MA and reduced volatility. Bearish scenario upon a break of 3790.
1. There is a clear downward trend channel that started on the 4th of January 2022. That is a one-year long bearish trend. When I see such trend channels, I look for signs to see whether the trend is strengthening or weakening.
2. One of those signs is the 200-day moving average, shown here as the blue line. In a strong trend you'll see the gap between price and the blue line widening, while the opposite indicates a reverse to the mean. A hard rejection after a test of the 200DMA is usually a bearish sign, while a weaker rejection is a les bullish sign. In this case, we can spot that the rejections are getting less powerful, or the dips are at least ending more quickly. This is a mildly bullish sign.
3. There's two scenarios here. One starts with a break of the key 3900 level, which would trigger my bullish case with a breakout towards 4410. The bearish case requires a break of the 3790 level which would bring me to 3480. As you may see from the attached chart, there is a lot of symmetry in the moves and once you find the horizontal centers of the moves, you'll start noticing that tops and bottoms are quite predictable.
4. Cyclicality is also worth noticing. The time frame between the first and second low was approximately four months. The same applies to the time between the tops (3.5 to 4.5 months). The significantly lower high is like a break in the cycle and signals that volatility is reducing. This could very well be a sign of an upcoming trend change. If we defend 3790, the cycle will be disrupted and we should see the recent lows as cycle lows, which would bring us to a high of 4410 as discussed earlier. Time frame would be mid- to end-Feb. If however we break 3790, we should see a test of 3690 which then becomes the horizontal center of the cycle, with a target cycle low of 3280, possibly in the first half of February. The reduced volatility would have then been followed by a return to high volatility. Side note: the level of 3480 has been drawn as possible intermediate support.
Conclusion: base scenario is bullish due to a weak rejection from the 200-day MA and reduced volatility. Bearish scenario upon a break of 3790.
Note
We are now outside of the trend channel, so it looks like we are on track to reach the 4410 target.
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