To Bear or Not To Bear?

The Market can be a real drama queen, we'll have to wait until next week and see if the S&P 500 enters officially into Bear Market territory (20% loss or more compared to the previous high). In order to qualify as a Bear Market it has to fall to 3,854.90 , which it did but then it recovered towards the end of the trading session, barely closing above the 3,900 weekly support.

Market Overview

From time to time, I mention in my articles that trading isn't about forecasting, there's no one that can consistently predict the future in the chaotic Markets. However, our brain is after all, a prediction machine that tries to keep us safe using the least amount of energy.

Here are a few clues that the Market provided this week and my personal point of view about them trying to satisfy that curiosity about the future. If you want the short version of it, I still think the Correction will continue it's way to sending all the main indexes into a Bear Market.

Clue #1: I'm a trend trader, so the weekly chart is very meaningful for me. If the 3,900 support breaks, fear is likely to dominate the Market sentiment and the index is likely to continue falling.

The weekly chart closed the trading week in oversold territory (-3 Keltner Channel or below). What looks different from the two most recent times when that happened (green dotted arrows in the screenshot below) is that it has been a slow and painful descent from 4,818 to 3,900.

In the weekly chart you can see that during the last 7 weeks the decline doesn't seem to be slowing down. The 30-week EMA (blue line) is also pointing down. The horizontal solid black lines will be essential references when defining if the weekly chart is tracing a downtrend. When we finally get a rally, in order to break that downtrend pattern, it needs to go above 4,650.

Clue #1 isn't that encouraging, a lot of bearish signals in the weekly chart. A V-shaped recovery isn't discarded as it already happened the last couple of times the index closed at the -3 KC or below. However, that V-shaped recovery needs to translate into a serious display of force from the Bulls during multiple weeks, which is something we haven't seen during 2022.

Clue #2: Everything can happen in the Markets, but not everything is equally likely to happen. So far the rallies in 2022 have been disappointing at best. In the daily chart of the S&P 500 below, I have marked every multi-day rally since October 2021. You could probably disagree on the reference I took in order to calculate each rally, but even tweaking a few parameters, the numbers won't change much.

The rally that produced fewer gains (marked in red) lasted only two days and gained 113 points. The most powerful rally (marked in blue) lasted eleven days and produced 458 points. In order to break the weekly downtrend pattern the S&P 500 needs to get to 4,650 which is around 750 points away.

The idea is not to discourage anyone, but being realistic, something very surprising and powerful needs to happen during a period of several weeks of bullish sentiment in order to change the current Market situation. A rally of more than 250 points with the latest numbers seems ambitious.

Clue #3: The New Highs and New Lows (NH-NL) numbers aren't improving significantly. Certainly, the selling pressure diminished, especially in the Yearly and Weekly columns (E and F). However, the numbers in the fastest timeframe (columns G, H, I) are deteriorating again. In the Monthly timeframe, the Monthly New Highs haven't even been able to get to 500 since April/21, while in the same period of time the Monthly New Lows have reached levels higher than 3,000.

The New Monthly Lows are like gravity, the higher the amount, the more powerful the gravitational pull will be for a rally that tries to take off. The New Monthly Lows need to decrease significantly and soon after that the New Monthly Highs need to keep increasing during multiple days. That would help confirm a powerful rally or a V-shaped recovery.

Industries

Reviewing the 68 Industries that compose the Global Classification Standard (GICS), the scenario is aligned with the bearish dominance felt during the week. Only three Industries, from my point of view, are still strong. That's only 4% of the entire Industry GICS list. Eventually some Industries will bottom and start recovering, those Industries will be the leaders starting a new Bull Market. At this point, still seems early to tell which Industries will trigger that new bullish period.

Scenarios

Scenario #1: After reviewing the data, I consider that the most likely scenario for the next trading week is that the Market could try to hold for a couple of days around the 3,900 weekly support, but eventually the support will break. We have plenty of negative news and even the most insignificant bad news make the indexes decline. There's a shortage of good news and the rallies usually don't even last a week. If there aren't bullish news next week, there is a high probability that the all the main indexes end in a confirmed Bear Market territory.

Scenario #2: The second most likely scenario from my point of view is that the 3,900 support holds and maybe even generates a small reaction rally. Something that could last 3 or 4 days and generate 250 or less points. In this scenario, we could start to think about a bottom forming with small rallies and pullbacks during the process.

Scenario #3: A V-shaped recovery is the less likely scenario, not impossible but highly unlikely. There has to be some powerful catalyst, which we haven't seen since March/2020 that takes the index at least to 4,650. Something that breaks the downtrend pattern forming in the weekly chart and makes it clear that the Bulls still have some force. A recovery like this wouldn't complete in a week, so the bullish news would have to last for at least a couple of weeks, with the current selling pressure it's hard to imagine what would produce such a move.

Summary

The next trading week looks complicated at best. Whether you look for a Market direction in the daily, weekly or monthly chart, there aren't important bullish signals yet. The only thing someone could hope for next week is a reaction rally, and they usually have been short-lived, and hope isn't the best strategy to rely on.

I feel in great shape at this point since I exited my last position 3 weeks ago, and even before that I started closing the rest of the losing positions. Manage your risk, in order to continue playing this game the first and most important factor is capital preservation. There's no point in thinking about great profits if you can't continue in the Markets.

Bottom picking is a dangerous game, Bears are still in control and my analysis indicates that anything could easily resume the correction and send all of the indexes to Bear Market territory. Trust your strategy, follow your rules and manage your risk in order to survive the current Market conditions.