The break of January lows likely proves short-lived

Key Takeaways

• DJIA, SPX and QQQ all closed at the lowest daily closes since last Spring, but failed to take out intra-day lows from January 2022 last month which looks important
• DeMark indicators are closer to signaling exhaustion and coincide with cycles
• Yesterday’s note on 5 reasons to expect an upcoming low remains intact; it looks better to look at buying into weakness vs expecting stock indices to decline throughout March

Overall, Wednesday was more negative than positive.  Following several weeks of meandering around in choppy fashion, stock indices all broke down sharply to close under January lows on a closing basis while SPX and DJIA lie right at January intra-day lows.  QQQ, as shown below, remains relatively weaker, but closing in on targets at 326, with possible support under that level found at 314.  Any rebound back above 342 would be important and positive.  However, DeMark’s TD Sequential and Combo indicators remain 4-5 trading days early to reach completion on QQQ daily charts, while these are closer to reaching bottoms on weekly charts, with prices due to potentially complete TD Buy Setups right at TDST support next week. 

Bottom line, what does Wednesday’s decline suggest, if anything, about the likelihood of a bottoming process as outlined yesterday? 

First, I still believe meaningful trading lows are around the corner.  While Wednesday’s pullback did look bearish, prices are at or near January lows in SPX and DJIA and have not broken down.

Second, fear is starting to creep back into the market, and sentiment has turned from pure disgruntlement, to actual concern in recent days.  While evidence of capitulation is not yet present, I expect downside volume to swamp upside if/when January intra-day lows are broken, making this a short-lived decline. 

Third, DeMark indicators are getting closer to exhaustion, but are not yet there on daily charts and this was discussed as being “near” last evening.  A further decline into next week would help this to be complete.  

Fourth, my cycle composite does turn up into March.  Thus, buying dips into the last week of February looks ideal.   

Finally, given that key stocks like AAPL and MSFT along with GOOGL are all very close to meaningful trendline support, it’s my thinking that these stocks all hold, and don’t break down on this decline. 

Overall, keeping a close eye on January lows will be key.  Under this level it’s right to hold off on immediately buying until this can be recouped, with an “Under-Bearish, Over-Bullish” type mentality.   January lows are the “line in the sand” so to speak.   Yet a bottom should be in place by March 7 and rally back higher for US stock indices.  (One week later than I discussed a week ago)

Head and Shoulders pattern? Or Not?   Confirmation is going to be important  

Most investors have begun discussing SPX’s pattern as a potential Head and Shoulders pattern.  A few thoughts on these patterns are important to relay. 

-Patterns of this sort cannot be called Head and Shoulders patterns before a verified break of the “neckline” the area that connects the various lows of this pattern.  Until that time, these often can be consolidation patterns that end up resolving higher.  In this case, 4222.62 is important and below would be considered a confirmed break, structurally.

-It’s normally more beneficial to keep a close eye on the “neckline” and see if prices engineer a false breakdown (undercutting intra-day lows before snapping back above) which makes sense given sentiment and contracted breadth and cycles, vs. trying to chase a break of former lows.

-The shape of this pattern isn’t too convincing of a symmetrical Head and Shoulders given the uneven level of lows along with the “Head” being very choppy.  Yet, I do view any pattern of a high, then higher high, than lower high which comes right back to challenge/break lows as being a negative, no matter what it’s called. 

Intra-day patterns often can provide an early clue as to a bottoming process

While most investors tend to not be too short-term in their approach, taking a quick look at hourly charts can often provide some clues as to when this decline is approaching its end.   By watching for times when former lows are exceeded back to the upside, or downtrend lines are broken, these kinds of charts often are quite helpful and show lots of early evidence that prices might be turning higher. 

Thus, two key areas stand out as being important:  First, the area at 4354-9 is key which represented Tuesday’s highs as well as this existing downtrend.  Note that this also represents 2/14 intra-day lows.  Anytime that two different areas line up closely, it adds to their importance.  Furthermore, 4212.75 represents January intra-day lows in Futures which lines up with 4222.62 in SPX Cash index.  Now that indices are down to January lows, watching carefully for divergences between Cash and futures will be quite important, in terms of whether Futures confirm the breakdown in Cash, or vice versa.  Furthermore, examining for evidence of Nasdaq starting to trade relatively better to SPX will also be a positive to watch for in the week ahead. 

At present, breaks of 4222.62 in SPX or 42.12.75 in S&P Futures likely take down to 4129, or a max to near 4000 before bottoming.  This latter level is determined by measuring the length of our current decline to the first decline from early January, as they’ll often approximate in price and time before reaching support targets.   While a seemingly extreme level, 4000 would allow both of these waves since early January to be equal and should provide strong support followed by a sharp rally if touched.   Finally, note that the early rally in Futures got up to but not over this existing downtrend and then turned back lower.  Trends like these can often provide some insight, but in this case, suggest that the early morning bounce was insufficient to form a low Wednesday morning.

What can AAPL tell US about this recent decline?   AAPL remains the stock that’s likely the most important to concentrate on for those hoping for a turnaround given its percentages among the larger indices and ETF’s.   Daily charts show this trend still holding up in good fashion from last year, which is comforting and a far different story than the indices plummeting to multi-month lows.  However, the near-term trend has been bearish for about a month as part of this larger uptrend. 

Thus, two areas are of key importance for AAPL in the near-term:  First, the January intra-day lows of 154.70.  Given that uptrends on daily charts also intersect here adds to this level’s importance.  Furthermore, getting back up over 166.56 would also be enlightening, as this represents the last swing low of this recent pullback from early February.   Any weekly or monthly close down under 154.70 would be a technical negative and postpone the rally.