Market Timing, Red Light or Green Light

The 'Squid Game' is a South Korean tv series, where hundreds of desperate and financially strapped contestants are invited to compete in a series of children's games. One of the games looks like the current Market situation, in 'Red Light, Green light', the players move from the starting line toward the finish line. If one of the players tries to move when the red light is on, he or she gets killed, a deadly version of the game. The players need to move at a moderate pace so that they can stop on time when the red light turns on.

Currently, the Bears aren't strong enough to continue pushing the Market below 3,800 and the Bulls haven't been able to break the 4,150 resistance which I have been mentioning for a long time now. Move aggressively in any direction, and your account could suffer severe damage if you get trapped on the wrong side of a trade. Day traders or swing traders might not have such a big issue with the current volatility. Trend traders, on the other hand, will struggle to find a winner that can withstand the Market alternating between selling pressure and weak demand.

Green Light

Eventually, after weeks, months or years, the S&P 500 will finally break the two milestones that I have been mentioning in every article for the past months (4,150 and 4,350). The 30-week EMA (blue line) has flattened, and the interesting part is that there is evidence that the Bears have lost some power.

In the weekly chart below, the S&P 500 started a sharp decline in 2022 that sent it to the weekly -3 Keltner Channel (KC), after that, the selling pressure has decreased, and the next decline pushed the index to the -2 KC only. There was a KC bullish divergence, the index went to its current bottom of 3,491 but in terms of volatility it couldn't get as low as the previous decline.

The KC provides evidence that the Bulls aren't that strong yet, they might have been able to stop the decline, but there hasn't been enough demand to break the +1 KC resistance (yellow highlighted areas). Compare that to the rally of 2020-2021, once it started the index never went below the 30-week EMA and it was moving at overbought levels for a long time (overbought level is considered to be +3 KC or above, green highlighted areas).

In a scenario when the Bulls finally start to break significant resistances, the 30-week EMA will start to point upward and we finally see that the index starts to operate above the +1 KC. This is unlikely to happen in a single week. In order for the S&P 500 to break the weekly +1 KC it has to close above 4,200. If we zoom in to the daily chart, that requires a lot of demand.

The lower black dotted line is 4,150 a resistance that has only been broken once (yellow highlighted area) and it didn't last much time. Getting to 4,200 or 4,350 would send the index to deeply overbought areas, increasing the risk of a pullback.

Red Light

Anything can happen in the Markets, the inflation/recession drama isn't over yet. The Ukraine war and the tensions between USA and China are active issues. If you are only ready for the 'green light' scenario that increases the risk of severe damage to your trading account.

If the selling pressure spikes, the level to monitor is 3,700. It's a level that even during the Bear Market, when the supply was at its highest point, was rejected (yellow highlighted area). If the S&P 500 goes too far below that level and it doesn't recover quickly (1 or 2 weeks) the decline is likely to accelerate and then we are in uncharted territory. The next strong support might not occur until the index reaches 3,400.

Summary

It's impossible to compare 2022 and 2023, the Market is changing. That doesn't mean that the Bears are done, most of the important Market catalysts are still negative. The Bear Market might have temporarily stopped, the S&P 500 is far from the levels of Oct/2022, but we cannot assume that that is enough evidence that the Market will have a powerful rally or that the Bears won't try to make a comeback.

We all play this game in a different way. If you are an adrenaline junkie that can sit in front of the screen all day, your personality might be better suited for day-trading. That doesn't work for everyone, follow your trading plan, whatever that is and if the current situation matches the conditions of your strategy, pull the trigger and manage the risk accordingly.

There isn't a final decision yet, in terms of the Market direction for the next few months. The Market might move in the direction you expect for a few days or weeks, but things can get ugly pretty fast. Without risk management, the probabilities of blowing up your trading account increase exponentially. It's a boring way to keep you playing the game.