Technical analysis of US stock market index for the month of February 2022
It has been sometimes since I wrote something here. I think it is once again time for me to be regular. At least writing 3 times a week to update you of what is happening in the market.
I have been quite busy with my farm. It has been really fun playing with the farm, building infrastructure and stuff. But for my readers, I felt that I may have neglected you.
Last week the S&P 500 formed a very big weekly bottoming tail. As you probably know, the bottoming tail could be a sign of a bullish reversal. That is as long as the S&P 500 trades above the lows of the bottoming tail in the next few weeks.
If the S&P 500 breaks below the low of the weekly bottoming tail, then this signal is neglected and we will see a continuation downwards. The presence of a large weekly bottoming tail in the S&P 500 is not surprising since there is support below.
Support does not break that easily especially if it is long term support. Therefore, the market can be expected to bounce back up rapidly when long term support is met. On the other hand, the long term support is now said to have been absorbed. Its power will be diminished and therefore, if the S&P 500 breaks below the low of the weekly bottoming tail, then we can expect more bearish moves in the stock market.
Imagine a tower of defense being bombarded. It is now broken. The enemies need to retreat but if they advance again with no tower of defense, then we could see the enemy advance more and more.
If we zoom into the daily chart of the S&P 500 above we can see how the S&P 500 made a leg lower. I believe the moves last Thursday and Friday are oversold bounces. The question now is whether these bullish moves can mature into a bullish reversal for the entire stock market.
In order to ascertain whether that is possible, I will employ the use of 2 downtrend lines. The first one is the shorter one while the other is a longer one. Watch the 1st one carefully.
A solid real bullish reversal will go above the 1st downtrend line and never go below it again. We are currently sitting on the fence so it is hard to say what will happen soon.
If S&P 500 stays above the 1st DTL we can consider a real bullish reversal is in the making. Next we want to see the S&P break above the second DTL. This is a classic solid bullish reversal signal and if that happens, we can be quite certain that the bullish reversal is genuine. The S&P 500 is highly likely to have found a bottom in this bearish move.
The last chart I want to show you today is the chart of the XLK. The XLK has dropped to an area of long term support and formed a weekly bottoming tail. The presence of a bottoming tail in the weekly chart of XLK is promising. It hints of a possible reversal.
What we want to see is for the XLK to go above the highs of the weekly bottoming tail. If it drops below the low of the weekly BT then more selling will happen. That is the nature of a bottoming tail. They tell us of a possible bullish reversal but if there is no follow through then we can expect more downward movement.
Next we want to see the XLK break above the downtrend line. It looks like a small line in the weekly chart but if you zoom into the daily chart, the downtrend line becomes significant. If XLK is able to break above the DTL, then we can expect more bullish moves to come in the near future.
We are not in a trending situation and it is sometimes hard to do anything when in this situation.
This week as I scan through the S&P 500, I do not see any stocks that I would like to buy. SPY is hovering near the 200 MA and this could act as a support. It is also where price support is.
So this could give a psychological support as well as price support. If the 200 MA holds then the next thing you want to see is whether it can trade back above the downtrend line that I have drawn.
Downtrendlines are important gauge of trend change.
You want to watch this carefully. If SPY manages to go above the downtrend line, this could be a good area to look for stocks to buy since many stocks will go higher.
On the other hand, if SPY drops below the 200 MA, then we could see more weakness ahead. There could also be the possibility that SPY could test the prior low set in January 2022.
Looking at the 2 hour chart of the SPX we can see that it is quite weak. There is support at the previous consolidation but it looks weak. If the support which I have highlighted in green does not hold, then we could see more selling happen.
Ever since the topping tail appeared near the declining 20 MA, SPX has been weak. It is now at the 200 MA and if the 200 MA does not hold then we could see more selling ahead.
So far I do not see any signs of a bullish reversal. Therefore, one should be very careful with initiating any long positions. It is below the daily 20 MA and thus this is not a good sign for bullish plays.
The last few green bars were oversold bounces and therefore one should be careful of them.
With the markets weak, we could expect the utilities to be strong but they were quite weak. I do not see strength in the utilities yet since it has not broken above the downtrend line convincingly.
There is the 200 MA support as well as price support.
Although there is a fast rally back up we are seeing resistance kicking in.
Yesterday a topping tail formed in the SPX and this should tell us to be careful. The SPX is also very near the downtrend line resistance. This is an area for us to watch because if SPX fails to go back above the downtrend line then this could spell more selling pressure.
The next few days could be crucial. If sell off continues, then we will have to look at the 200 MA for support. If the 200 MA fails then this could set up for a leg making lower lows.
Unless the S&P 500 trades back above the downtrendline, we are not in a strong position to have a bullish move to make new all time highs.
A topping tail pattern appeared in the SPX yesterday. Today the market may be drag down by Facebook's earnings. FB might open down 20%. This is what I call a oversold rally.
When it is oversold....the market can usually snap back up very fast but when it happens, a trader should take profits quite fast in the event of resistance kicking in. If a sell off happens I want to see it finding support at the 200 MA.
The downtrend line will be crucial, unless SPX breaks above it, we are in a bumpy ride and traders should have a guerilla approach.
After breaking out of a small triangle that is hovering near the 200 MA, the SPY continues to move up. I think it is possible for it to continue to move higher but one has to be careful of a resistance above. Price resistance as well as the 50 MA psychological resistance.
One good thing that is going for the SPY is the fact that it is going to make a MACD buy signal soon. Hopefully this will help to propel the markets higher.
I do expect some slowing down of bullish momentum as it moves near the 50 MA. So if you are long do take that into considerations.
I continue to advise you to take trades that are near their 20 MA, 50 MA and 200 MA.
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