Early Warning: Topping Signals
Craig Thompson | Nov 21, 2022 12:03AM ET
The stock market is at a short-term inflection point. The advance off the October lows has been indecisive and has lost momentum right under resistance (200-day moving average). This would be a logical area for the market to reverse course and head lower.
On the other hand, a weekly close above the 200-day moving average and last week’s high would be bullish. The next two weeks’ market action will be telling.
Below is a weekly chart of SPY ETF. Here are my takeaways:
- The index closed right under its 200-day moving average which is resistance.
- The past week ended with a Doji candle. This candle suggests a loss of momentum when occurring after a move higher.
- The last three advances ended with the same type of candle.
Below is a daily chart of SPY in the upper panel and in the lower panel I chart the percent of stocks within that index that are above their respective 20-day moving averages.
Notice how each time the percent of stocks above this moving average exceeds 80 it has been a reliable indicator of a change in trend. The index is currently above 80.
I view these two charts as early warning signs. They are useful in that they keep me focused on looking for corroborating technical evidence of a change in short-term trend.
If we see a strong move down this week, that weakness could trigger other signals such as momentum indicators rolling over, the VIX rising, etc. Weakness would beget more weakness.
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