5 Key reasons why Equity lows should be near

Key Takeaways

  • Tuesday’s strong showing in rebounding off the lows after Monday evening’s “down” open is a reason to think this recent geopolitical tension might not be all that bearish
  • While Consumer Discretionary was hit hard in Tuesday’s session, Financials held up relatively well along with the Defensive groups
  • 5 Key technical reasons are discussed which suggest why this recent pullback should bottom

Equities look to be closing in on initial lows to this decline, and S&P Futures prices rallied well up off early lows at 4250 early Monday evening in the Futures market to close above 4310 by Tuesday’s close, which looked important.  While the near-term price structure, and momentum remains negatively sloped, there are numerous technical developments that are worth highlighting that speak to the possibility of lows being near for US equities just a time when many are seeking safety.  I’ll discuss my top five reasons on the pages ahead, but important to note that while many cite Russia/Ukraine tension as being a reason for near-term volatility, much of this recent downdraft was far more pronounced last month, along with late November.  The recent churning in the last couple weeks has been far more orderly, and a bit more constructive as a possible successful retest of January lows. 

5 Key reasons why Equity lows should be near
Source: Trading View

Key levels to watch in the days ahead will be 4391.25 in S&P Futures, and then a close back over 4411.50 which would exceed last Friday’s intra-day peaks.   On the downside, 4250 for  ES 1.34% _F is initially important, then 4212.75.  (Similar levels for SPX cash are (Resistance-4362.12, then 4394.60 on the Upside and downside Support – 4267.11, 4222.62 ))

5 Key reasons why Equity Lows could be near 

1) Near—term Breadth has improved-  SPX percentage members trading above their 20-day moving average finished at 34% on Friday 2/18/22, more than double the levels seen at the January lows.  The grinding nature of the decline in recent weeks actually has been helpful to short-term breadth, as the pullback has not been as violent, and fewer stocks are hitting new lows now than what happened in late January, despite indices near the same levels

5 Key reasons why Equity lows should be near
Source:  Optuma

2) Counter-trend exhaustion indicators suggest lows should be near

While not a huge part of my analysis, I do utilize DeMark’s TD Sequential and TD Combo indicators on multiple timeframes, and these are all close to lining up in showing downside exhaustion, both on absolute charts of SPX, QQQ as well as relative charts of QQQ/SPY in relative terms.  While a bit more weakness this week would help these come into alignment a bit more perfectly, it’s worth pointing out that these are now back on the radar.  QQQ charts on 240-minute charts (each bar is four-hours) could complete a TD Combo “13 Countdown Buy” signal within another 2-3 bars, with TD Propulsion targets down near January lows.  While not yet complete, the near completion of QQQ counter-trend exhaustion with a few other key indices is interesting, and worth monitoring.

5 Key reasons why Equity lows should be near
Source:  Symbolik

3)High yield spreads don’t look to have widened that materially compared to Investment grade credit –One way I look at credit, technically speaking, is to study how Investment grade corporates are trending vs. High Yield corporate bonds.   The ratio of  LQD -0.09%  to  HYG -0.21%  (Ishares iBoxx Investment Grade Corporate Bond ETF, relative to the Ishares iBoxx High Yield Corporate Bond ETF) has been largely subdued lately and not broken out as might have been expected if credit trouble was a problem.  As can be seen in the left hand side of this chart, back in 2020 during the volatile March 2020 period, LQD made a giant breakout vs HYG, showing huge underperformance by High Yield.  This time around, this ratio largely has not budged.  Some of this could be based on Energy’s recent strength, as this sector having performed quite well has not been a source of stress to credit markets like it was back in 2020.  At any rate, while the Option Adjusted Spread has been moving a bit higher, I don’t yet view this relative chart below as a signal that Credit is under pressure.

5 Key reasons why Equity lows should be near
Source: Optuma

4) Cycle composites show strength into FOMC March meeting.  This Mass Pressure index chart I utilize has been quite accurate in the last few years in helping to guide the market’s movement.  The decline in January 2022 occurred as this composite suggested might happen.  Furthermore, the choppiness of February has also played out.   The upcoming weeks are likely to allow for a sharp push higher into mid-to-late March, which makes me think it’s right from a risk/reward perspective to buy into this recent US Equity decline for a push higher into Mid-March, even if it proves not to be a straight line.  While the next 3-5 months on this chart look bearish, the near-term is shaping up to be bullish and should be a positive for US equity bulls for upside progress.

5 Key reasons why Equity lows should be near
Source: Optuma

5) No real strength in Havens like Dollar/Yen (USD/JPY) or Dollar/Swiss Franc (USD/CHF) This is also interesting to see, as there hasn’t really been any material strengthening in Dollar/Yen which would be thought to be ongoing during a time of Equity market weakness.   This Carry-trade proxy remains in good shape technically, appearing more like an uptrend seen during a “risk-on” rally, not a time of market duress.  Overall, this looks promising towards thinking the Yen can decline technically (USD/JPY pushes higher) and does not seem to be indicating any real market stress like what happened back in March 2020.

5 Key reasons why Equity lows should be near
Source: Trading View
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