Reiterating several key trendlines, investors should be aware of

It was one of the worst starts to the first half of the year for equities, with the S&P 500 Index (SPX – 3,825.33) currently down 19.7% year-to-date. Only a dozen years pale in comparison when looking to history for analogies to our current trajectory. In fact, 1932, 1940 and 1970 are the only years on record that went downhill at the end of the first half.

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However, the good news is that we usually see some sort of relief rally for equities when this happens in July, as the seasonally strong month attempts to sweep away the negativity. The bad news is that in most years where stocks were down 10% or more at the end of the first half, they continued to struggle after their mid-summer rallies. The only exceptions were 1970 and 1982, as stocks miraculously ended positive in those years. Moreover, history shows that a potential relief rally could end as early as August or extend into the fall before stalling. This keeps us in a nimble and nimble business regime as we navigate one of the toughest business environments since 2008.

“If you step back into the market using the SPX as a benchmark, several resistance levels are still above, starting with its 40-day moving average, which entered the week just above the level of around 4 000. The SPX’s 40-day moving average acted in concert with short-term lows in February and March to crush the latest rally attempt.

Monday Morning Outlook, June 26, 2022

Last week, the S&P 500 fell back below the key level of 3,852 (representing the closing price of the S&P 500 marking President Biden’s inauguration in 2020) after a temporary move above by the previous week. Likewise, this level is almost 20% below the 2021 year-end close, as we mentioned in previous comments. These psychological levels have become a near-term critical zone over the past three weeks, coinciding with the June 13th low gap level acting as the major pivot point. A move back above 3,850 in the SPX, at the very least, could lead to a small rally to test the 40-day moving average, currently at 3,948. This is where price action has been capped at several times during the early June bear rally. If the price action can break above the 40-day moving average this time around, I would expect a return to the upper rail of its current downtrend which could push the SPX to the level around 4,000 millennials. .

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Still, if the bears stay in check this week, a technical break of 3,750 would be the first level I would watch for further decline as these traders attempt to shrug off the seasonally bullish July. This would open the door for stocks to potentially continue lower for the first few weeks of this month. If the bears can sustain the bearish momentum and break through the recent lows at 3640, we could see a quick move to test the 3550-3505 support zone. This level coincides with the 50 Fibonacci retracement level % from the March 2020 low to the January 2022 high, and the September and October 2020 highs, making this a logical downside target.

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Additionally, the open interest setup for the S&P 500 Trust ETF (SPY – 381.24) aligns well with the two technical possibilities outlined above. The maximum sell level of 370 strikes at the July monthly expiry stands out like a California redwood. These contracts are mostly sold at the open by market makers, which could indicate strong support. Still, a violation of this level and the subsequent technical lows I have outlined above would potentially place us in a delta hedge scenario that would take us to the 350 strike, which is our bearish technical objective.

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However, the Nasdaq 100 (NDX – 11,585.68) and the Russell 2000 Index (RUT – 1,727.76) are also near areas where it makes sense to think a bearish rally could occur. NDX closed just above the 40-month moving average in June, which has been an area where monthly candlestick wicks have seen support in the past, and Friday’s price action was able to hold close. of this level for the moment. Interestingly, the Nasdaq has not lost this level since regaining it in November 2009. Even during the tech bubble of 2000, the 40-month moving average provided support for a massive bearish rally from a months before resuming its downward trend. Additionally, the RUT is trying to find support at its 2020 highs. These developments compel us to consider adding long exposure, even if only for a short-term trade.

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When looking at one of our favorite sentiment indicators, the 10-day opening buy volume ratio for the S&P 500 constituents came in at 0.76. This paints a backdrop where we can see a short-term rally, but in that backdrop, being able to call any type of longer-term meaningful bottom remains murky, as these levels remain below previous highs relative to large market pullbacks during major recessions. . However, the ratio is still rolling from an extreme peak level that we saw in May and June. Simultaneously, NDX’s 10-day buy/buy volume ratio is also down, with a reading of 0.81, and is a week away from highs not seen since 2016. Additionally, this high was a stones throw away from the peaks we experienced in 2012 and 2016.

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Both bulls and bears find themselves in places where they have to manage expectations and wait for confirmation from direction. As a trader, these are the times when we can often get ourselves into trouble by being biased or even just broke as market participants fight for direction. Stay nimble but be patient at levels like the ones we mentioned before. One move above 3850 and we can look to go long for a trade as we outlined earlier areas to watch and target. One miss here and we could be a crazy few weeks away from the July options expiration. In these stages of bear markets, it’s less about predicting direction and more about executing, because you don’t want to get caught on the wrong side of the band.

Matthew Timpane is senior market strategist at Schaeffer’s Investment Research

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