SPX Triangle Will Break Soon but Which Way?Which Way Will the SPX Triangle Break? Consider All the Arguments
Ever since the October 2022 lows, the S&P 500 SP:SPX has been consolidating especially when considered on larger time frames like daily and weekly. This consolidation has formed what is known as a triangle pattern (or symmetrical triangle). A triangle is a consolidation pattern that represents equilibrium in the balance between buyers and sellers. The range narrows and price action compresses until the consolidation ends. 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. 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. For further discussion on the details of this triangle, please refer to the linked chart and post under Supplementary Chart A below.
Supplementary Chart A
1. Arguments for Bear-Market Continuation and Further Declines to New Lows
VIX has been trending lower to new lows. But this argument cuts both ways—it lies at multi-year support as well as the support zone for this entire bear market. It’s not a spot to be complacent. On the other hand, VIX could be forming a new seasonal range lower than the past few years. The downtrend in volatility must be respected until it breaks. But the break could be vicious and fast, occurring in a matter of hours / days. For now, VIX keeps failing right at the down TL from early October 2022 peaks.
Supplementary Chart B (VIX)
Consider the orange-colored down trendline from mid-October 2022 highs. Price continues to fail at that down TL. But price is also in the yellow rectangle, which is the major support / demand zone for volatility over the entire bear market to date. The pink uptrend line is a multi-year uptrend line where VIX has found support since 2017.
SPX shows a daily bearish divergence on RSI. But no weekly divergences yet. Stochastics and another indicator (EFI) both show clear divergences on the daily. But sometimes triple divergences form. And sometimes, these divergences are erased with higher price action. Divergence create the conditions for a decline, they don’t guarantee one. And without weekly divergences yet, this minor daily divergence is too weak a signal to take to the bank.
As of the December 2022 FOMC meeting, the Fed had not paused and it had not pivoted. In fact, the Fed remained hawkish, communicating a “higher for longer” message to markets. The FOMC’s published SEP (Summary of Economic Projections) showed that rates were forecasted to peak at 5.1% (on average) which was higher than its prior rate forecast of 4.6%. The Fed’s projections also showed that it expected no rate cuts throughout 2023. In other words, higher for longer, even if rate hikes were paused.
Will the Fed’s messaging and policy from December 13, 2022, remain steadfast? If so, the markets will likely struggle to find a way higher unless they continue to completely disbelieve the Fed. Note that rate markets (and equity prices) are currently disagreeing with the Fed about rate cuts later this year. That all could change on February 1, 2023.
Money supply has continued to shrink. Tom McClellan said to financial media recently that M2SL has been shrinking while GDP has been growing, and this has never happened—the ratio of M2/GDP has never been shrinking this fast. Note that there is a lag b/w M2 changes and the effects on markets. But M2 has been shrinking for a while now. Note that when M2 rises faster than GDP, this can fuel rallies a year later, but this is the opposite of that scenario.
However, note that US Treasury Department maneuvering relating to the debt-ceiling crisis could hamper the Fed’s efforts to drain liquidity from markets. Other than its general effect on markets, this maneuvering is well beyond the scope of this article and the author’s knowledge.
Consumer spending and corporate profits cannot hold up much longer given the leading economic indicators (PMIs, ISMs, Empire State Manufacturing Index, retail sales reports from December, mortgage applications, and housing data). But equity markets don’t seem convinced. Markets can remain irrational longer than traders can remain solvent.
Gold on a ratio chart to SPX (GLD/SPX) is still outperforming. This is not an all-clear signal for equities, especially the blue-chip index of US stocks.
Supplementary Chart B (GLD/SPX)
Typically, a bear-market bottom / final low does not happen while yield curves remain inverted. One WS analyst stated unequivocally yesterday that 85% of the yield curves are currently inverted. According to that firm's indicators, if more than 55% of the yield curves are inverted, a recession always follows. But when? The timing is the tricky part especially for traders and investors. Bear markets can fool the vast majority.
The 3m/10y curve has been inverted to levels not seen since 1981. The inversion has fallen deeper into negative territory than any other inversion on the data available on TradingView’s charts. The final bear-market low typically happens after the Fed has pivoted and cut rates for some time. And remember, when the Fed cuts, it’s not because the economic outlook and corporate earnings are bright. Rather, the Fed cuts because of deteriorated economic conditions, tanking earnings and earnings estimates, horrible employment numbers (a recession).
Supplementary Chart C.1 (3m/10y)
For further discussion on the 10y/3m yield curve, see the post linked here:
Supplementary Chart C.2
Recent PMI data from SP Global was negative economically (US Manufacturing PMI at 46.7 while December was 46.2, and US Services PMI at 46.6 while December was at 44.7) though it moderated somewhat (slightly less negative) from the prior month’s data.
“The US economy started 2023 on a disappointingly soft note with business activity contracting sharply again in January. It showed subdued customer demand and impact of high inflation on client spending. January data also 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.”
The commentary by SP Global’s economist provided along with their recent PMI report noted that “not only has the survey indicated a downturn in economic activity at the start of the year, but the rate of input cost inflation as accelerated into the new year, linked in part to upward wage pressures, which could encourage a further aggressive tightening of Fed policy despite rising recession risks.” This suggests that even if inflation has peaked, it may not be heading to the 2% target as fast as it moved down from the peak to the current levels. And it implies that stagflation may be around the corner as economic growth slows but sticky inflation does not dissipate.
Major past selloffs in markets have been preceded by a very low unemployment (UE) rate. The rate has been as low as 3.5% recently. One analyst, Eric Johnston at Cantor Fitzgerald, noted that investors would do well by buying markets when the UE rate is 9% to 10%, and selling the market when it reaches extreme lows from 3% to 4%. UE rates haven’t begun to significantly roll over, and the Fed has remained focused on the tight labor markets and services sectors as sources of more sticky inflation. So if PMIs from January are showing wage pressures increasing somewhat, that doesn’t suggest the Fed will be *cutting* rates soon, though a pause may be discussed as rates approach 5%.
Taxes as a percentage of GDP are at the level that coincides with recessions. Taxes are 18% of GDP.
2. Arguments for a Rally That Precedes New Bear Market Lows
First, a rally that breaks the down trendline does not immediately negate the bear market. The 2000-2002 bear market experienced a substantial multi-month break of its down trendline (complete with a successful backtest after the break) before the next major leg down to new lows occured.
Supplementary Chart D (2000-2002 Example)
SPX continues to stabilize above major support / resistance zones such as 3900 and 3950. And it has closed above 4000 three consecutive days this week: January 23, 24, and 25. When it meets the down TL, it has not been reacting lower the way it has on every other test of the trendline during this bear market. It’s spending quality time with the TL, which is a new phenomenon / characteristic when price and the TL meet.
SPX continues to hold above major anchored VWAPs from August, October, and December 2022, which range from 3850 to 3900.
AAPL's price action is fairly bullish in the short-to-intermediate term. Here are the bullish technicals arising on AAPL's chart.
AAPL’s daily chart shows a failed breakdown beneath major support levels over the past year. AAPL broke below $134.37 and $129.04 and fell to a new low, but quickly reclaimed $129.04 and $134.37, so this constitutes a failed breakdown. The failed breakdown is visible on the daily chart, so this is supportive of prices for several weeks to a couple months. $134.37 was the level coinciding with the lows from October 13 and November 4, 2022. $129.04 was the June 2022 low, which was undercut in December 2022 and early January 2023. Price broke below all these levels and then immediately reclaimed them.
AAPL’s failed breakdown coincided with a tag of the parallel downtrend channel from the all-time high.
AAPL shows positive (bullish) divergences with momentum indicators on both the daily and weekly charts.
AAPL remains right at or slightly above the down TL from the mid-August 2022 highs, which was a fairly steep 5-month downtrend.
AAPL remains above a short-term TL from June lows, but it also remains contained in its downtrend channel from the all-time high. AAPL is in no-man’s land, with some bullish forces that brought it here (divergences and failed breakdowns)
Supplementary Chart E.1 (AAPL's Failed Breakdown)
Supplementary Chart E.2 (AAPL's Parallel Channel Support)
NDX (Nasdaq 100) broke above its down TL (linear chart only) and has held above it as well. It also has been making higher lows since the October 2022 lows.
Supplementary Chart F.1 (NDX QQQ Log TL)
Supplementary Chart F.2 (NDX QQQ Linear TL)
IWM broke above its down TL on both log and linear charts. But it remains at critical resistance at the $188-$192 zone. It remains above intermediate term VWAPs from swing highs and lows in August, October and December 2022 (which are around $180), but it still remains below the VWAP anchored to its all-time high.
Supplementary Chart G (IWM Linear TL)
HYG broke above its down TL. Like other TL breaks, this could ultimately be a false signal, but here it has persisted for some time. HYG had a breakout above its down TL in the 2007-2009 bear market driven by the great financial crisis. This breakout was a false signal b/c the bear market was not over until early 2009, when the SPX made new lows. HYG resumed a downtrend after breaking above its down TL and went back to lows again and made lower lows, a move that coincided with SPX heading to new lows in Q1 2009. HYG shows a small bearish divergence on RSI on the daily chart. Wait for a larger bearish divergence to form on both daily and weekly charts perhaps.
VIX has been trending lower to new lows. But this argument cuts both ways—it lies at multi-year support as well as the support zone for this entire bear market. It’s not a spot to be complacent. On the other hand, VIX could be forming a new seasonal range lower than the past few years. The downtrend must be respected until it breaks. VIX keeps failing right at the down TL from early October 2022 peaks.
Consumer spending and corporate profits cannot hold up much longer given the leading economic indicators (PMIs, ISMs, Empire State Manufacturing Index, retail sales reports from December, mortgage applications, and housing data). But equity markets don’t seem convinced. Markets can remain irrational longer than traders can remain solvent.
Earnings at major publicly traded companies may not be deteriorating quickly enough to disprove the “soft-landing” narrative that pervades markets. Recession does not mean stocks go straight to lows when yield curves have inverted. Recessions take time to unfold, just as the damage to economies takes time when rates are restrictive. There is a lag.
Both FTSE and DAX have taken out the highs from mid-December 2022. FTSE is approaching multi-year highs. Both have broken above down TLs from the bear market. Both have decisively reclaimed 200-day SMAs. Both have been forming higher highs and lows
Multi-week bear-traps occur frequently where significant down trendlines are broken until the bear market resumes in earnings in a period of several weeks or months. The 2000-2002 bear market provides an excellent example of this. So a break to the upside in the triangle pattern on SPX may last for several weeks or even months before the real downside move begins. Just because it’s been challenging and choppy does not mean it won’t get worse and more trappy.
The third year of a presidential term (US markets) is nearly always bullish. There have been exceptions according to Tom McClellan (technical expert citing 1939 as an exception to this rule but noting that Hitler’s army was marching across Poland at the time). Some have said that the most bullish quarter of the presidential cycle is Q1 of the third year (technical expert Mark Newton speaking to financial media on January 24, 2022).
Breadth has been strong lately, and some technical analysts have cited “breadth-thrust” indicators as giving bullish signals.
Markets continue to disbelieve the Federal Reserve. Consider the differential b/w the Fed’s forecasts and the rate markets forecasts about whether rate cuts will happen this year, and where the terminal rate will be. So even if the Fed remains hawkish at the next meetings, perhaps it won’t matter. Markets will do what they want to do, including "fighting the Fed." You don't have to fight the Fed though or any other central bank. But don't fight the trend either.
The Fed’s messaging at the February 1, 2023 FOMC presser may be slightly more dovish, or it may be interpreted as dovish if Powell so much as mentions a pause in hikes, or that the FOMC is discussing a pause. Even if Powell remains hawkish, sometimes markets can interpret the Fed Chair’s statements (sometimes ambiguous) the wrong way—recall that this happened at the July FOMC in 2022, after which Powell cleared up the confusion at Jackson Hole in August 2022 (tanking markets immediately).
Equity positioning remains fairly underweight US equities according to financial experts on this subject. This could lead to momentum chase higher to trap all the bears before the real decline gets underway. Maybe stocks continue higher until two things occur: EPS estimates fall further, employment numbers start getting quite ugly, and the Fed is not as accomodative as it has been in past economic recessions (because while inflation has peaked, it may not fall directly to the 2% target, and with easing financial conditions, perhaps inflation could stop falling rise in Q1 2023)
Equal-weighted S&P 500 (RSP) has broken above its down TL on a daily close as of January 25, 2023.
The offense-defense ratio (consumer discretionary divided by consumer stables) RCD/RHS shows a breakout in this ratio above 8-month highs in the ratio’s value. This potentially signals near-term strength in equity markets as offensive stocks (consumer discretionary) outperform stocks defensive names (consumer staples)
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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.
