SPY Uncertainty High as Trends Collide
Updated
Primary Chart: S&P 500 (SPX) as represented by SPDR S&P 500 ETF (SPY)
1. SPX and Recession
A recession is exceedingly likely in the near future. It could officially begin next month or in 4 months. But does that mean bears should be rewarded by a straight-line decline to new lows? Sadly not.
Unfortunately for market participants, the S&P 500 S&P 500 (
SPX / 
SPY) has confounded bulls and bears alike in recent months. Since June 2022 lows, SPX has traded substantially within the 3800-4000 range (380-400 SPY).
After last year's lows on October 13, 2022, SPX rallied hard into mid-December 2022, only to be rejected at its down TL from its all-time highs. Down trendlines are one way of gauging a trend, especially the more times that price touches the trendline and reverses, showing it is a valid and effective dynamic boundary for market prices.
When price was rejected from the mid-December 2022 highs (on December 13, the date of that month's FOMC presser), it fell rapidly into the 3800 SPX / 380 SPY range. Then it spent over two weeks within that range doing price discovery before breaking out and retesting the downward trendline (from all-time highs) this week. Many bulls called for 4100 SPX / 410 SPY saying the lows are in. Bears furiously covered shorts. Then bears were rewarded late this week as bad macro data started to be respected by the markets.
But will bears continue to be rewarded? Just because a recession looms does not mean prices must go straight to new lows. Yes, they might, and they could very well do so, especially with the Fed not backing off much at all. But price could also find a reason to squeeze shorts one last time before heading to new lows. Be prepared for anything.
2. VIX Signals
VIX told us earlier this week that the S&P 500 (SPX / SPY) was in a precarious spot. A multi-year trendline on VIX lies just below where it closed Friday, January 13, 2023. This trendline provides major support at approximately 16.80 to 17.00 on VIX, and VIX closed at 18.34, its lowest level in a year (specifically, the lowest level since January 2022 when SPX had just finished making its all-time highs).
However, VIX remains within a downtrend, subject to a trendline that has contained VIX levels since they made their most recent peak at mid-October 2022 lows. Until this downtrend is broken, clarity on the next trend leg in SPX will be difficult to find. In the VIX chart below, notice the yellow downward trendline containing VIX peaks more or less. And the pink line is the long-term upward TL that has provided long-term support.
Some say TA cannot be applied to VIX. Strong opinions exist on both sides of this issue. Some of the best technical analysts serving institutions apply TA to VIX, and others do not.
Supplementary Chart A.1
To those who are skeptical, SquishTrade would ask whether you would bet against the long-term upward TL each time VIX levels have reached it. In other words, would you sell vol when VIX fell to its very long-term uptrend line? Each time it has done so, it has moved back higher off that line. See Supplementary Chart A.2.
Supplementary Chart A.2
3. SPX Triangle
A triangle is a consolidation pattern. The Primary Chart above shows the current triangle that has formed. It is essentially a collision between a 3-month uptrend and a 13-month downtrend (lasting over a year since January 2022 highs). So long as price remains in this triangle, uncertainty about the intermediate term direction will likely remain high.
Many triangles have arisen this year, and each one has led to new lows. This one may as well, as the yield curves and macro data support this outcome. But price could whipsaw out the top of the triangle for a month or two before heading to lows. All possibilities remain on the table. Expert Elliotticians have continued to change their wave counts as the year has progressed. This does not mean they are bad at their craft—it simply may point to the challenging nature of the price action.
In the intermediate term, direction remains murky given the collision between these two uptrends. Ultimately new lows should be formed. But will a powerful rally rip higher to trap bears first? Will price action whipsaw around after a triangle breakout before figuring out a recession is coming and the Fed won't come to the rescue as quickly and spectacularly as in the past? These are the questions that many are trying to answer. This post contains no short-term directional bias—it's too close to call.
So despite the powerful rally off October 2022 lows, and despite the powerful rally off late December 2022 lows, and the rapid decline this week, price remains stuck in a very large triangle on the daily chart. See Primary Chart.
Notice how the edges of this triangle align in early February (right around the FOMC meeting) at key Fibonacci levels. See Supplementary Chart B.1 The smaller blue circles point to key pivot levels at 3800 SPX / 380 SPY and 4000 / 400 SPY. The larger blue circle shows the apex of the triangle and the (compressing) range it covers from 388 to 396 / 3890-3970 SPX, where price may remain for a bit longer.
Supplementary Chart B.1
Here is an additional chart showing the Fibonacci levels a little more clearly. The key .618 retracement of the August-October 2022 decline lies at 399.79 SPY / 4000 SPX. Above that, a .786 retracement lies at 402.85 SPY. These now are both outside the downward trendline. If the downward trendline is adjusted for the whipsaws in mid-December 2022 (yellow downtrend line chart below), these key Fibonacci levels could be tagged within the "adjusted" down trendline. To the downside, notice how multiple Fibonacci levels come in right at 380 / 3800 SPX. This seems to be a line in the sand, also from a support perspective. When 3800 is decisively broken, watch out below for a new low.
Supplementary Chart B.2
Note the 200-day SMA which has been widely discussed in financial media over the past week as it was tested yet again. This 200-day SMA is the magenta EMA in Supplementary Chart B.2.
4. Anchored VWAPs
The anchored VWAPs—anchored to key swing highs and lows since June 2022—align quite well with the lower boundary of the consolidation triangle discussed, especially as more time passes and that lower boundary (an uptrend line from October 2022 lows) rises. See Supplementary Chart C.1. The VWAPs show a support range of 3870 to 3900 SPX / 836-388 SPY. If these are broken decisively, watch out for the upward trendline as it may break too. If these are held, as they have been so far this week, uncertainty remains high.
Supplementary Chart C.1
VWAPs also show confluence with two key Fibonacci retracements, the .50 retracement and the .618 retracement of the recent rally from December 22, 2022 to January 17, 2023.
Supplementary Chart C.2
1. SPX and Recession
A recession is exceedingly likely in the near future. It could officially begin next month or in 4 months. But does that mean bears should be rewarded by a straight-line decline to new lows? Sadly not.
Unfortunately for market participants, the S&P 500 S&P 500 (
SPX / SPY) has confounded bulls and bears alike in recent months. Since June 2022 lows, SPX has traded substantially within the 3800-4000 range (380-400 SPY). After last year's lows on October 13, 2022, SPX rallied hard into mid-December 2022, only to be rejected at its down TL from its all-time highs. Down trendlines are one way of gauging a trend, especially the more times that price touches the trendline and reverses, showing it is a valid and effective dynamic boundary for market prices.
When price was rejected from the mid-December 2022 highs (on December 13, the date of that month's FOMC presser), it fell rapidly into the 3800 SPX / 380 SPY range. Then it spent over two weeks within that range doing price discovery before breaking out and retesting the downward trendline (from all-time highs) this week. Many bulls called for 4100 SPX / 410 SPY saying the lows are in. Bears furiously covered shorts. Then bears were rewarded late this week as bad macro data started to be respected by the markets.
But will bears continue to be rewarded? Just because a recession looms does not mean prices must go straight to new lows. Yes, they might, and they could very well do so, especially with the Fed not backing off much at all. But price could also find a reason to squeeze shorts one last time before heading to new lows. Be prepared for anything.
2. VIX Signals
VIX told us earlier this week that the S&P 500 (
SPX / SPY) was in a precarious spot. A multi-year trendline on VIX lies just below where it closed Friday, January 13, 2023. This trendline provides major support at approximately 16.80 to 17.00 on VIX, and VIX closed at 18.34, its lowest level in a year (specifically, the lowest level since January 2022 when SPX had just finished making its all-time highs).However, VIX remains within a downtrend, subject to a trendline that has contained VIX levels since they made their most recent peak at mid-October 2022 lows. Until this downtrend is broken, clarity on the next trend leg in SPX will be difficult to find. In the VIX chart below, notice the yellow downward trendline containing VIX peaks more or less. And the pink line is the long-term upward TL that has provided long-term support.
Some say TA cannot be applied to VIX. Strong opinions exist on both sides of this issue. Some of the best technical analysts serving institutions apply TA to VIX, and others do not.
Supplementary Chart A.1
To those who are skeptical, SquishTrade would ask whether you would bet against the long-term upward TL each time VIX levels have reached it. In other words, would you sell vol when VIX fell to its very long-term uptrend line? Each time it has done so, it has moved back higher off that line. See Supplementary Chart A.2.
Supplementary Chart A.2
3. SPX Triangle
A triangle is a consolidation pattern. The Primary Chart above shows the current triangle that has formed. It is essentially a collision between a 3-month uptrend and a 13-month downtrend (lasting over a year since January 2022 highs). So long as price remains in this triangle, uncertainty about the intermediate term direction will likely remain high.
Many triangles have arisen this year, and each one has led to new lows. This one may as well, as the yield curves and macro data support this outcome. But price could whipsaw out the top of the triangle for a month or two before heading to lows. All possibilities remain on the table. Expert Elliotticians have continued to change their wave counts as the year has progressed. This does not mean they are bad at their craft—it simply may point to the challenging nature of the price action.
In the intermediate term, direction remains murky given the collision between these two uptrends. Ultimately new lows should be formed. But will a powerful rally rip higher to trap bears first? Will price action whipsaw around after a triangle breakout before figuring out a recession is coming and the Fed won't come to the rescue as quickly and spectacularly as in the past? These are the questions that many are trying to answer. This post contains no short-term directional bias—it's too close to call.
So despite the powerful rally off October 2022 lows, and despite the powerful rally off late December 2022 lows, and the rapid decline this week, price remains stuck in a very large triangle on the daily chart. See Primary Chart.
Notice how the edges of this triangle align in early February (right around the FOMC meeting) at key Fibonacci levels. See Supplementary Chart B.1 The smaller blue circles point to key pivot levels at 3800 SPX / 380 SPY and 4000 / 400 SPY. The larger blue circle shows the apex of the triangle and the (compressing) range it covers from 388 to 396 / 3890-3970 SPX, where price may remain for a bit longer.
Supplementary Chart B.1
Here is an additional chart showing the Fibonacci levels a little more clearly. The key .618 retracement of the August-October 2022 decline lies at 399.79 SPY / 4000 SPX. Above that, a .786 retracement lies at 402.85 SPY. These now are both outside the downward trendline. If the downward trendline is adjusted for the whipsaws in mid-December 2022 (yellow downtrend line chart below), these key Fibonacci levels could be tagged within the "adjusted" down trendline. To the downside, notice how multiple Fibonacci levels come in right at 380 / 3800 SPX. This seems to be a line in the sand, also from a support perspective. When 3800 is decisively broken, watch out below for a new low.
Supplementary Chart B.2
Note the 200-day SMA which has been widely discussed in financial media over the past week as it was tested yet again. This 200-day SMA is the magenta EMA in Supplementary Chart B.2.
4. Anchored VWAPs
The anchored VWAPs—anchored to key swing highs and lows since June 2022—align quite well with the lower boundary of the consolidation triangle discussed, especially as more time passes and that lower boundary (an uptrend line from October 2022 lows) rises. See Supplementary Chart C.1. The VWAPs show a support range of 3870 to 3900 SPX / 836-388 SPY. If these are broken decisively, watch out for the upward trendline as it may break too. If these are held, as they have been so far this week, uncertainty remains high.
Supplementary Chart C.1
VWAPs also show confluence with two key Fibonacci retracements, the .50 retracement and the .618 retracement of the recent rally from December 22, 2022 to January 17, 2023.
Supplementary Chart C.2
Note
Here is the yield curve superimposed on a chart of US recessions.The recessions are in orange. Notice how the yield curve pivots and starts to leave inversion territory at the start of the recession for two of the three recessions. For the first recession shown, 2000-2002, the recession begins right as the yield curve is reaching its lowest point.
This offers clues from history about when a recession may begin. It will either be right about when the yield curve's inversion reaches its lowest level (like 2000-2002). The yield curve is currently at a 42 year record inversion low (measuring how far down into inversion territory it is). Maybe this is the spot where it's near its lowest level, and if this is like 2000-2002, the recession may already be underway, as argued by one other astute TV member here, by tracking rates of change for quarterly continuing UE claims:
If the recession is like 2007-2009, the yield curve must return to positive territory before the recession begins, which could take 1-4 months from the inversion low point perhaps, before one might expect a recession.
Key point: The market never bottoms *before* a recession occurs, it always bottoms during a recession. To do otherwise would be unique historically.
Note
The pane below the yield curve chart above is the S&P 500 (SPX) price on the same time frame (monthly) as the yield curve shown above it.Note
Even AAPL is stuck in an indecisive spot. It recovered major support levels that were broken in December 2022. The breakdown of that support combined with the recovery of the support = failed breakdown, and can be short-term bullish.But it lies just beneath major resistance as well, a key trendline shown. See the blue circle, in between major levels. AAPL showed a bullish divergence on daily and weekly charts last week. Does it have further to run higher? Or is this where it breaks? Much may depend on (1) earnings later this month, and earnings in other major names, and (2) FOMC on Feb 1. So not only is SPY in a highly uncertain triangle, where two trends converge, AAPL is in a similar spot.
Note
PMI data dropped today. Chris Williamson, a chief economist at SP Global Market Intelligence made various comments including this potentially relevant one for the FOMC meeting on Feb 1:"The worry is that, not only has the survey indicated a downturn in economic activity at the start of this year, but the rate of input cost inflation has accelerated into the new year, linked in part to *upward wage pressures*, which would encourage a further aggressive tightening of Fed policy despite rising recession risks."
Stagflation?
Note
The PMI surveys showed further decline in output. The manufacturing and service index numbers were slightly better than estimated. But overall US "registered a further decline in output at the start of 2023 . . . . The fall in business activity softened to the slowest in three months as manufacturers and service providers signaled moderations in their respective downturns.""January data indicated a faster increase in cost burdens at private sector firms. Although well below the average rise seen over the prior two years, the rate of cost inflation quickened from December and was historically elevated."
A few more quotes from the SP Global PMI data release
Note
Despite all the (very good) reasons to be bearish, it's starting to look like this market is going to rip higher in Q1. ST is not committed to this notion 100%, but wanted to give followers a heads up. Do bear market rallies every make sense? No. They didn't make sense this year. And sometimes, they break trendlines in the process. Look at the 2000-2002 bear market. A major down TL was broken only to be a multi-month head fake. See the weekly SPX chart below. The light blue TL was broken for many weeks (with a successful backtest) and no doubt many calling the bear market as being ended and lows as final. But it wasn't. The TL just needed an upward adjustment over a period of months.
Be open to this possibility. Anything can happen. No one knows whats next. And with consensus being so bearish (finally), it makes sense that markets *could* work against that consensus and lure in trillions in longs before finally selling off viciously to new lows.
To be safe, wait for the decisive break of the triangle. That will tell us a lot more than any forecast could ever tell.
Note
Despite heavy selling this morning, SPX / SPY remains within the triangle pattern. Likely won't resolve this pattern until FOMC. Coincidentally, the apex of the triangle is early February 2023. FOMC is Feb 1.SPY is also holding above its point of control at 395 (3950/3960 SPX)
Note
Final comment: This post suggested that "just because a recession looms does not mean prices must go straight to new lows. Yes, they might, and they could very well do so, especially with the Fed not backing off much at all. But price could also find a reason to squeeze shorts one last time before heading to new lows. Be prepared for anything."In short, the triangle was broken to the upside as short-dated call volumes and short-covering and momentum driven CTA funds drove price significantly higher to about 4195 SPX.
Please see this post for further SPX updates over the next week:
SquishTrade
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