Stock Market Tariffs Bounce Again

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SPX Technical Analysis

• Some may remember that I was warning before the December top and January bottom about likely reversal.

• At least in the premium newsletters, I suggested that the stock market could rally into mid-February, likely toward OPEX.

• However, we are getting mixed signals from the technical analysis of the daily SPX chart.

• The technical indicators are in the middle, neither overbought nor oversold, much less exhibiting some divergences that could provide hints.

• In the last two weeks, SPX has been oscillating around 10D EMA, indicating a trendless market.

• The dips are bought, and bounces occur from the red trendline, which I also indicated as a bounce target. This is bullish.

• My primary EW count, shown in the chart, is also bullish, although strictly speaking, it may have been completed on 24 Jan, while other indexes failed to make new highs.

• The price pattern since 24 Jan can be interpreted as a “Bullish Flag” (see technical patterns in educational material).

• Bears can point to the same pattern as the start of a leading diagonal down of double 1-2 pattern down, in EWT terminology.

• The orange trendline connects three bearish candles and is called bearish “3 Indians.”

• Notably, the last two are bearish engulfing patterns suggestive of trend reversals.

• Yesterday, SPX had an inside green day, which typically means traders were cautious. 

• However, a significant dip in the futures on Sunday, following news of steel and aluminum tariffs, was heavily bought, such that cash SPX gapped up and closed with a green candle, which is bullish.

• A down day below the last inside day candle will confirm the bearish engulfing candle, while an up day above the inside day candle will invalidate the bearish potential.

• Although there is more bullish potential, it is not clear sailing. The risk will increase in the next 1-2 weeks given the long-term overvaluations.

Sentiment & Technical Analysis

• The Fear & Greed Index is back to Neutral, barely, but no signals from it.

• Continuing our opening remarks, every “Trump tariffs” dip last week was immediately bought.

• It coincided with the largest stock market funds inflows on record, as indicated by the chart below.

• What is the source of funds?

• Most likely, the majority comes from margin debt as indicated by unprecedented levels of margin debt, as shown by the second chart below.

• As mentioned earlier, buying the dips in a rising market is a good strategy. Employing the margin debt could even enhance the returns.

• However, in this highly overvalued market, by many indicators we posted, one should be careful and exercise prudent risk management.

• At some point, when a reversal comes, buying the dip will not work, and the market will just continue sliding down. Traders will try again the next day, and the same story will continue, and so on, for several days. Their hard-earned profits from multiple months or years of suitable buy-the-dip trading will evaporate. 

• When margin calls hit, traders must sell positions at losses. That is a typical story in down markets.

• As a part of risk management, in addition to stop loss orders, one might want to recognize whether a down open will be reversed or will become a continuation down day.

• Although I do not have accurate statistical data, I have a solid observation formed over 30-35 years following the stock market.

• In most cases, a down opening is reversed by approximately 11 am Eastern time. If it is not, it will likely become a continuation down day.

To continue reading about Market Summary, US Markets, Elliott Wave and Technical analysis of US Markets, volatility, as well as commodities, bonds, forex, currencies or crypto, upgrade to Premium Pro. . .

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