Broker Check
Mixed Signals - Market Indecision

Mixed Signals - Market Indecision

July 01, 2022

Key Takeaway

The S&P 500 is still in a clear downtrend; however even "Bear Markets" have rebounds that can be significant.  For instance, as illustrated in the first chart below, during the Tech Bubble beatdown from 2000-2003, the market had more than several "Bear Market Bounces" that averaged 20-25% before fading back into their longer-term downtrend.  The S&P 500 is due for one of these "bounces" - and close attention is necessary to determine the validity of the bounce as a sustainable breakout vs dead cat bounce (false breakout).

The next chart below gives us some mixed signals.  For instance, the S&P 500 found support on the bottom orange line; however, was unable to break above the red resistance line or it's 20 day moving average (black arrow). Overall the market trend looks terrible, of course; however, there are a few signs that, if they can hold, could eventually prove to be somewhat bullish (or positive) even if only for the short-term.  1) the pink circle shows double Doji candlesticks that signify market indecision where the buyers and sellers are at a breakeven. 2) There possibly appears to be a longer-term Falling Wedge pattern (brown dashed lines), that has bullish potential.  The falling wedge is not super clear yet, but if it indeed manifests, it could serve to be a bullish, short-term reversal signal. Time will tell if the various levels of support hold, and more importantly if they will set up a "dead cat bounce" only to resume their longer-term downtrend or if will they mark the final bottom.  Either way, we'll look to play the up-swings to a degree as they could be quite significant, as illustrated in the above chart. I personally believe we have not found the bottom quite yet, but that is why we use technical analysis to take the emotion and personal beliefs out of the equation, as no one knows, especially the "talking heads" on TV. 

Market Pros:

  • The market is demonstrating some mixed signals - possible falling wedge breakout could be a positive short-term signal.
  • The market is due for a bounce - we are nibbling at the edges at some stocks we feel could be well positioned for a bounce, while keeping cash levels quite high.

Market Cons:

  • Down-trend is still too strong to get too cute at this point - heavy cash is still the play for now.
  • The market is stuck between heavy support and resistance, resulting in a lot of choppiness.