What Do the S&P 500 and Nasdaq’s Charts Say?Let's take a look at charts for the S&P 500 SP:SPX S&P 500 and the Nasdaq Composite Index NASDAQ:IXIC to see where the market might be heading.
The S&P 500’s Technical Picture
Take a look at the S&P 500’s chart going back to early January:
Check out the market action from last Friday (March 14) -- a day when New York Stock Exchange winners beat losers by roughly 16 to 3.
Advancing volume took a commanding 90.1% share of composite NYSE-listed trade, and an almost as impressive 80.8% share of composite Nasdaq-listed activity.
However, aggregate trade nonetheless dropped 3.1% on a day-over-day basis across NYSE-domiciled names and 0.8% for Nasdaq-listed ones.
In other words, there was less conviction in last Friday's rally than was visible in any of the recent down days that led to that session.
As a matter of fact, that Friday was the quietest trading day for S&P 500 stocks since Feb. 20 -- more than three weeks earlier. Hence, we could probably not call Friday’s rally a change in trend.
Then came the Federal Reserve’s latest monetary-policy statement and press conference this past Wednesday (March 19).
The Fed left rates unchanged, but its “dot plot” reiterated that the central bank still expects to cut rates by 50 basis points this year – news that helped send the S&P 500 and Nasdaq up more than 1% each.
Would technical analysis have told us to expect this?
Well, readers will note that the chart above shows a so-called “double top” pattern of bearish reversal from early January through late February (marked “Top 1” and “Top 2” in the red boxes above.
Next, the S&P saw what we call "Day One" of the bearish change in trend on Feb. 21, marked with an orange box in the chart above.
A “Day One” isn’t necessarily the first day of a trend change. Instead, it’s merely the first day of a trend change that occurs broadly and on sharply increased trading volume.
The S&P 500’s “Day One” above was followed by a so-called "Confirmation Day" on Feb. 27.
A “Confirmation Day” is a session that confirms a trend change. It can come anywhere from two days to several days after the Day One.
However, a Confirmation Day must represent a broad move and come on increased trading volume -- and there’s also a catch. There must be a pause in between the Day One and the Confirmation Day.
This suggests that portfolio managers took some time, thought about what they were doing and then continued to either increase or decrease exposure depending on the Confirmation Day’s pattern (up or down).
Without this pause, what we would have is one long move that doesn’t confirm anything technically.
In the above chart, all of what we saw was a spot-on sign of a double-top pattern.
But next came a so-called "Outside Day" on March 3 -- a one-day pattern that hinted at increased volatility to come.
An Outside Day occurs when the trading range of a given day completely envelopes the day prior and the open and close of said day also encompass the open and close of the day prior. This one-day pattern often signals a coming period of increased volatility.
Next, the S&P 500 saw a so-called "faux Day One” last Friday, March 14. That could have kicked off a bullish change in trend, but the S&P 500 rose on light trading volume.
Additionally, the SPX never made a serious run at retaking its 200-day Simple Moving Average (or “SMA,” marked with a red upwardly sloping line above).
Technical analysis won’t tell us much about the S&P 500 (or the Nasdaq Composite, for that matter) as long as those indexes trade below their 200-day SMAs. That often keeps portfolio managers on the sidelines.
In fact, much of the swing crowd tones down their activity as well as long as the major indices don’t even make a run at their respective 21-day Exponential Moving Averages (or “EMAs,” denoted by the green line above).
Also note that even on the down day of March 18, the S&P 500’s trading volume (marked with gray bars in the chart above) continued to tail off a bit, indicating increasing uncertainty.
That said, readers will see a slight uptick in trading volume for this past Wednesday (Fed Day). The S&P 500 was up nicely that day, and got off to a good start on Thursday (March 20) as well.
Alone, that’s not enough to christen a new "Day One" of a bullish trend reversal, partly because the Nasdaq Composite was not as active (as readers will see below).
Typically, Wall Street would like to see both major indexes up on sharply increased trading volume to declare a “Day One” bullish reversal. The SPX and Nasdaq have come very close to allowing us to do that, but don’t appear to be there yet.
Technical Analysis for the Nasdaq Composite Index
Next, let’s look at the Nasdaq Composite’s chart going back to early December:
The Nasdaq appears more challenged than the S&P 500 at this time, but both are close to giving us the first step of what the bulls need to see.
As with the SPX, the Nasdaq Composite saw a “double-top” bearish pattern in December and January (marked “Top 1” and “Top 2” above).
The index then saw a “Day One” and a “Confirmation Day” in late February, followed by an “Outside Day” on March 3.
It then saw an “Up Day” on March 19, although on lower trading volume. And as with the S&P 500, the Nasdaq Composite has yet to retake its 200-day SMA (the upwardly sloping red line in the chart above).
The Bottom Line
Add it all up and the major US equity indices look like they remain in a downtrend.
We still need to see a "Day One” move to the upside, then a pause and then a "Confirmation Day."
That could take up to a week, but to rush into things without confirmation is closer to gambling than it is to trading.
Again, the 200-day SMA is perhaps the most important item to watch on these charts. That's where large flows of capital will come from … if portfolio managers decide to increase their overall long-side exposure.
(Moomoo Technologies Inc. Markets Commentator Stephen “Sarge” Guilfoyle had no position in the securities mentioned at the time of writing this column.)
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