SPX Breakout Fails, Bearish 1H 2023, PT $3810
Updated
Primary Chart: SPX Long-Term TL and Anchored VWAPs, Fibonacci
SUMMARY:
S&P 500 (
SPX) broke above its downward trendline (TL) today. Price initially gapped higher by approximately 2.78% from yesterday's close. At first, it may have appeared that the breakout above the downward TL would be meaningful. But the breakout has largely failed. Failed breakouts provide a somewhat bearish signal. However, in this choppy and unpredictable current market this year, a series of failed breakouts both to the upside and downside frequently preceded the actual directional move in many indices, stocks and other instruments.
Whether SPX's down TL continues to hold as resistance and to contain price below it will remain of utmost importance in the coming weeks. Tomorrow, the US central bank will hold its press conference after a two-day meeting that started today, December 13, 2022. Similar to the CPI data release today, the FOMC presser tomorrow may cause excessive volatility and whipsaws like other FOMC days this year. Additional central banks in Europe (ECB, BOE, Norway, Switzerland) will be holding their meetings later this week as well.
Some traders may be wondering about a so-called Santa rally. Citi's quant strategists were quoted the other day claiming that "the Santa rally has not delivered when the returns of the first 10 months of the year are negative." Other statistics suggest that Santa rallies are less likely (though still sometimes occur) during bear-market years. Other recent charts shared publicly have also shown that bear markets show lower probabilities of a Santa rally. This does not mean the Santa rally will not occur, it just means that the odds are lower. Much will depend on what Fed Chair Powell says tomorrow and what the dot plot shows.
In any event, price action in SPX today was weak. A failed breakout does not inspire confidence that a new uptrend is forming. While price can do all sorts of unexpected things as it has all year long, it suggests more downside ahead despite better than expected inflation readings today. Price may still reach $4150 before the next downward move gets underway.
The performance of technology today supports the bearish case in SPX (and NDX). Technology is the largest weighting in both major US indices. But this sector also showed a failed breakout when considering the sector on an equal-weighted basis. US markets are unlikely to rally back to all-time highs when technology cannot change its downtrend structure.
Supplementary Chart A: Failed Breakout in Equal-Weighted Technology Sector
Negative divergence has arisen on the daily SPX charts with an RSI indicator for momentum readings. This should be monitored in days to come if a higher high than today's high is made. A higher high could negate the divergence, but a marginal new high (up to SPX 4120-4150) may not erase the divergence.
Supplementary Chart B: RSI Negative Divergence
Lastly, while some debate exists whether VIX may be subject to technical analysis, it can be helpful to pay attention to the trends and levels in the VIX at least. Today, VIX also showed a failed breakout to the downside below the range over the past week. In other words, VIX broke below the key trading range of 22.06 - 23.28 as markets ripped higher this morning. But interestingly, that breakdown ended up failing with price recovering back into the range.
Supplementary Chart C: VIX Intraday Chart with Failed Breakout and Failed Breakdown from Multi-Day Trading Range
________________________________________
Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
SUMMARY:
- SPX experienced a failed breakout above the downward TL. See the Primary Chart above. This suggests weakness ahead, but price may remain choppy throughout December.
- Price failed right at key levels including the VWAP anchored to the all-time high on January 4, 2022, a downward trendline that has been effective YTD, and a key Fibonacci level.
- Price targets will be initially set as follows: $3820 (conservative) and $3600-$3700 (aggressive).
- Because December tends to experience some bullish seasonality, this may affect prices by causing choppiness, preventing prices from going straight to new lows until 1H 2023. Bullish seasonality may not be enough, however, to result in a so-called "Santa Rally."
S&P 500 (
SPX) broke above its downward trendline (TL) today. Price initially gapped higher by approximately 2.78% from yesterday's close. At first, it may have appeared that the breakout above the downward TL would be meaningful. But the breakout has largely failed. Failed breakouts provide a somewhat bearish signal. However, in this choppy and unpredictable current market this year, a series of failed breakouts both to the upside and downside frequently preceded the actual directional move in many indices, stocks and other instruments. Whether SPX's down TL continues to hold as resistance and to contain price below it will remain of utmost importance in the coming weeks. Tomorrow, the US central bank will hold its press conference after a two-day meeting that started today, December 13, 2022. Similar to the CPI data release today, the FOMC presser tomorrow may cause excessive volatility and whipsaws like other FOMC days this year. Additional central banks in Europe (ECB, BOE, Norway, Switzerland) will be holding their meetings later this week as well.
Some traders may be wondering about a so-called Santa rally. Citi's quant strategists were quoted the other day claiming that "the Santa rally has not delivered when the returns of the first 10 months of the year are negative." Other statistics suggest that Santa rallies are less likely (though still sometimes occur) during bear-market years. Other recent charts shared publicly have also shown that bear markets show lower probabilities of a Santa rally. This does not mean the Santa rally will not occur, it just means that the odds are lower. Much will depend on what Fed Chair Powell says tomorrow and what the dot plot shows.
In any event, price action in SPX today was weak. A failed breakout does not inspire confidence that a new uptrend is forming. While price can do all sorts of unexpected things as it has all year long, it suggests more downside ahead despite better than expected inflation readings today. Price may still reach $4150 before the next downward move gets underway.
The performance of technology today supports the bearish case in SPX (and NDX). Technology is the largest weighting in both major US indices. But this sector also showed a failed breakout when considering the sector on an equal-weighted basis. US markets are unlikely to rally back to all-time highs when technology cannot change its downtrend structure.
Supplementary Chart A: Failed Breakout in Equal-Weighted Technology Sector
Negative divergence has arisen on the daily SPX charts with an RSI indicator for momentum readings. This should be monitored in days to come if a higher high than today's high is made. A higher high could negate the divergence, but a marginal new high (up to SPX 4120-4150) may not erase the divergence.
Supplementary Chart B: RSI Negative Divergence
Lastly, while some debate exists whether VIX may be subject to technical analysis, it can be helpful to pay attention to the trends and levels in the VIX at least. Today, VIX also showed a failed breakout to the downside below the range over the past week. In other words, VIX broke below the key trading range of 22.06 - 23.28 as markets ripped higher this morning. But interestingly, that breakdown ended up failing with price recovering back into the range.
Supplementary Chart C: VIX Intraday Chart with Failed Breakout and Failed Breakdown from Multi-Day Trading Range
________________________________________
Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
Note
One clarification: The chart on VIX does not necessarily support an immediate downside move *this week.* Rather, it shows that the VIX made a two failed breakouts of a range—a failed breakout above the range on 12/12, and a failed breakdown below the range on 12/13. If anything, this supports only a conclusion at this time that traders bought up SPX options premiums heavily before CPI data release and premiums were sold heavily just after the open. VIX may fall after the events from this week have fully passed—unless Powell does something unexpected and drives markets lower, in which case VIX could rise. A falling VIX does not necessarily mean markets will rally if market participants have been predominantly buying call positions, which implies that dealers are short calls and as IV falls, their long hedges would be sold (unwould). Hat tips to options and dealer-hedging experts Brent Kochuba and Imran Lakha for the insights on this issue: youtube.com/watch?v=IK0UeLzchOU
Kochuba and Lakha also argue that markets may pin around the 4000 SPX strike into 12/16 OPEX. If markets have a reason to fall, they may be prevented from doing so for a few days until billions of notional options exposure expires on 12/16. After that happens, the sellers may predominate and drive prices lower -- assuming there is a reason to sell. This is not a guarantee, just an options dealer hedging perspective about how markets may behave on this important monthly / quarterly expiration.
Note
FOMC statement was more hawkish than expected. Markets expected US Fed Reserve to reach a terminal rate in 2023 next year around 4.8%, maybe 4.9%. But the Fed's "dot plot" shows about 17/19 members see a terminal rate of 5.1%Now, let's see if Fed says something that whipsaws markets higher or lower.
The 4000 strike for SPX will probably stay in play until OPEX, as mentioned in the prior update, disappointing bears and bulls in the very short term (this week). You can see the pinning action this week around 4000 if you look at intraday charts covering the past 4 or 5 trading sessions
Note
SPX is over halfway to the 3800 conservative target. 3900 and 3850 are major supports though. Bounces and consolidation could occur here.This is likely the reaction to Powell's hawkish message yesterday. The Fed raised Fed Funds Rate target by 50 bps yesterday. Although Fed raised rates less than the previous four rate hikes of 75 bps, it delivered a hawkish message with a terminal rate of 5.1%, higher than markets had expected. And Fed said it saw NO rate cuts next year. No pivot here.
Imran Lakha and other rate and volatility experts are saying that markets (Fed Funds rate futures) are pricing in a year-end rate about 100 bps (1%) lower than the Fed's projection at 5.1%. This likely means a recession is coming fast based on what markets are implying.
Note
ECB came out with a very hawkish message today. Though it opted for a smaller rate hike of 50 bps (its target rate is only 2% compared to the US central bank's target rate at 4.25%-4.50%), it said it would raise rates quite a bit more to tame inflation. It also said it would reduce its balance sheet by over 
15B euros per month. The most hawkish moment perhaps was ECB president Lagarde's statement that "Anybody who thinks this is a pivot for the ECB is *wrong.* We're not pivoting, we're not wavering, we are showing determination and resilience in continuing a journey where we have . . . If you compare with the Fed, we have more ground to cover."
This will probably make European equities underperform US equities after a period where they outperformed US equities since October lows.
ECB, like the Fed, has a 2% medium term target. ECB forecasts EU inflation to remain above 2% target until *2025*! The forecasted inflation for the EU for 2022 was 8.4%, for 2023 was 6.3%.
Note
These anchored VWAPs can be very useful (thanks to their creator, Brian Shannon, CMT). They show right where price bounced today off lows. Look at the VWAP from the 10/13 low (black). Price nearly tagged the 10/13 VWAP at 3877 today (12/15). The low of day was 3879.45. See chart below.Another key VWAP is the one anchored to Covid lows at 3856 (pink) and the one anchored to June 2022 lows (green). These all seem to be areas where price could put in a temporary low and consolidate / bounce. These are important to watch. No one can guarantee what price will do tomorrow or next week. But the path of least resistance seems lower until a support level can be found. So watch some of these levels if you don't have your own supports.
The gap fill area shown on the Primary Chart ranges from 3800-3850 approximately. This will likely be filled in the coming days (perhaps tomorrow, perhaps next couple weeks).
Lastly, key Fib retracements to watch. For those that want to draw the Fibs themselves, run the retracement tool from the 10/13 low to the 12/13 high at 4100.96. Us the intraday high for the 12/13 swing high and use the intraday low for the 10/13 low (don't use the close). The following chart is log. But linear is pretty close to the same
Trade active
This post was originally published December 13, 2022, about one week ago Tuesday. SPX closed at 4019 that day. SquishTrade predicted more downside based on three basic technical arguments:1. Failed breakout above a major down trendline since the ATH, which confirmed that this down TL remains effective. A powerful two-month rally exhausted itself and reversed right at this TL.
2. Failure at a key Fibonacci level of 4101
3. Failure at a key VWAP anchored to the ATH on January 4, 2022
The conservative, initial target of 3820 SPX was virtually reached today. It was close enough to call a success. The low of the day was 3827.
SPX looks as though it is primed for a countertrend "relief bounce." When price sells off steeply, all bets are off in terms of picking bottoms, which is why the aphorism "don't catch a falling knife" exists. Nevertheless, signs are appearing that price could offer shorts another opportunity to get in, assuming a two or three day bounce to 3900 or 3950 occurs.
In a multi-week or intermediate time frame, the more aggressive target of 3600-3700 may also likely be reached.
Trade closed: target reached
Clarification: SPX hit the conservative target. The prior post today misstated the low as 3827. In fact, the low was squarely at 3800.04. This idea will be closed for now. This was a favorable / successful 219 point move on SPX within a week (much less time than expected)—the forecast was made at 4019, and the conservative target range was 3800/3820-3850.
One prudent principle to follow in trading is that if the majority (or even half) a price move occurs in far less time than expected, take the win / exit positions. On a per-day basis, this likely creates a better profit scenario than holding for the entire length of time originally anticipated even if only half of the expected move were to occur. (Example: If a move were expected in 20 trading sessions, but about half the move happened in 2 days, it makes good sense perhaps to consider taking profits on the half move at 2 days b/c the profit / day is much higher than the profit / day over 20 days even if the entire move occurred. In addition, more time exposure increases risk (time = risk). The longer a position is held, the more the expected move will widen in terms of range.
From a technical-analysis perspective as well, it also makes sense to reset the analysis when a forecasted move occurs much more quickly than expected. Instead of trying to reach the very end point of the aggressive end of the forecast, it may make sense to reset the bias and analysis to allow price action to provide more clues before developing the next target.
Lastly, the 3600-3700 aggressive PT remains in play. But SquishTrade prefers to consider that level after allowing price to provide more clues into YE. Price action could very well present choppiness into year-end. And provided price stays below the highs from last week, SPX is likely reach the aggressive target range of 3600-3700 in 1H 2023.
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