Chart Of The Day: S&P 500 Bear Market Ahead? Numerous Signals Say Yes
Investing.com | Apr 11, 2022 09:25AM ET
On Friday, Bank of America issued a dire warning via a weekly research note, saying a "recession shock" is coming. The bank's analysts noted that, "the macro-economic picture is deteriorating fast and could push the U.S. economy into recession as the Federal Reserve tightens its monetary policy to tame surging inflation."
Additionally, the strategists cautioned that the S&P 500 Index will "fall below the key 4,000 level by the end of 2022," a potential plunge of 11% from Friday's 4,488 close which would officially send the broad benchmark into a bear market. The catalyst for all this? Current recessionary levels which the Federal Reserve, so far unsuccessfully, has been struggling to control.
The technical chart is in agreement about the S&P 500's potential reversal.
The SPX recently registered a trough lower than the October low, interrupting the uptrend's rising flow. Even before that, the price had cut through the rising trendline, providing the initial signal of a reversal.
Last week's first decline since the February bottom—confirming the potential drop following the preceding week's High Wave candle—was a second clue. If the price extends the decline to below the 50-week MA, it will have provided a third reason to believe the uptrend is over.
Note, the 50-week MA was already temporarily violated from mid-February to Mid-March. This cross was significant because it was the first since the index surpassed that MA nearly two years ago, during May 2020.
The final signal for a reversal would be a lower trough, establishing a downtrend. A conservative interpretation would demand to see another set of lower peaks and troughs to achieve two peaks and troughs independent of the uptrend.
Meanwhile, the price closed below the 200 DMA on Friday, demonstrating that near-term prices are weakening, confirmed when the 50 DMA fell below the 200 DMA in mid-March, triggering the much-dreaded Death Cross.
Observant technicians would have picked up on not one but two negative divergence signals, both by the momentum-based RSI and the price average-based MACD, which fell against the rising price—before it broke the uptrend line.
A bear market will officially be established when the price drops below 3,836.70, registering a 20% decline from the index's Jan. 3 record peak. As of Mar. 8, the index had lost 13% of value, putting it merely in correction territory.
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The term correction connotes that the down move is simply a step back within an ongoing rising trend. A bear market sees the down moves as representatives of the primary trend, whereupon the rallies are suspect.
h2 Trading Strategies/h2Conservative traders should wait for the downtrend to be established which would occur if the price falls below 4,114.50.
Moderate traders could short if the price retests the Mar. 29 high of 4,637.30.
Aggressive traders would short now, provided they accept the higher risk with less confirmation when striving for the higher rewards attainable upon moving ahead the rest of the market.
Trade Sample – Aggressive Short Position
- Entry: 4,500
- Stop-Loss: 4,530
- Risk: 30 points
- Target: 4,200
- Reward: 300 points
- Risk-Reward Ratio: 1:10
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