Markets arguably are nearing a low, and while that likely is not in place just yet, it should bottom out in the month of April. The resulting bounce into June-August will say much about whether a larger correction/bear market and/or recession can be avoided. At present, trends, momentum, and breadth remain quite negative, but SPX has officially reached the 50% retracement of the entire bull run from 2022-2025. While markets remain extraordinarily volatile, the risk/reward should be excellent for those who have at least a 2-3 month timeframe. Unfortunately, more evidence is needed to try to mark a short-term bottom, but SPX and QQQ are getting closer technically, and it should happen in the next week. Those who require more diversification can still find better relative strength in Treasuries, Gold, and defensive sectors in the short run. However, my view is that “Magnificent 7” will outperform all of these on a 12-month basis.
Reasons for “Short-term optimism”
(Meaning buying stocks “gingerly” here with the idea that SPX will be higher in 3 months)
The reasons below suggest that an upcoming trading low is close. It doesn’t mean lows are in place, and I’m skeptical thus far that this is the case. Bounces from Monday’s lows do look possible. However, the base case suggests a possible failed bounce and retest/break of Monday’s lows by a small margin. This should generate capitulation while not resulting in much further damage. This would also form a perfect wave count from the end of March, as multiple gaps like what happened last week into Monday rarely form a low of any meaning.
The real importance has less to do with if lows are in place by this week or next. The key necessity to avoid a bear market at this point involves a strong, sharp, high breadth rally off the lows that exceeds SPX-5500. Moreover, broad-based participation on such a move is imperative. The lack of a strong move from April into July-August would be problematic, and likely result in another selloff into the Fall which could undercut recent lows.
For now, the base case is that lows should happen within a week and are based on some of the following factors:
Breadth has gotten washed out. Only 5% of all stocks are above their 20-day moving average.
Breadth momentum indicators are showing positive divergence – i.e., price is down, but momentum is higher.
Momentum is officially oversold and is as low as 2020 on a daily basis.
Sentiment has begun to show capitulation- Goldman’s prime desk showed the biggest shorting on record last week – Equity Put/call rose above 1, and term structure inversion on VIX has reached extreme levels. The Spot VIX traded at approximately 51 on Monday, while July Vix futures are at 25.
Elliott-wave structure shows a nearly complete move. Five-wave decline from March 25th high should be in place by next week but requires a minor bounce and then failure to briefly undercut lows.
SPX is nearing a 50% retracement of the entire bull run from 2022 into Feb 2025. Furthermore, this also equates to prior peaks of the Jan 2022 bull market peak. This should translate into strong support
Cycles show a bottoming in SPX by mid-April and a lift over the next couple of months.
Both Treasury yields and the Dollar have begun to reverse. These had correlated positively with Equities (both were declining as SPX moved lower; thus, seeing a change here is unusual and interesting).
DeMark weekly signals on MAGS- (Mag 7 ETF) and QQQ, SPY show that lows should be in place either this week or next.
US Equities seem to have priced in a worst-case scenario on tariffs. Allegedly, 75+ countries + have now approached the US about negotiating tariffs down. Thus, any hint of good news could likely bring about a pretty serious rally.
As shown below, the three waves down from late March don’t paint a perfect picture just yet structurally. This would benefit by a minor bounce and then a pullback to test and break recent lows. However, I am not expecting a move to 4500 and any minor undercut of Monday’s lows should make SPX actionable.
S&P 500 Index
Weekly SPX charts show the most oversold in five years while prices near monthly trendline “support”
Following up on the SPX weekly chart, the price has now reached a 50% retracement of the entire bull market run-up from 2022 into February 2025.
Four separate technical reasons come together to make the case for strong support at 4800-35.
- The uptrend from 2022 intersects near 4800.
- 4800 represents a 50% retracement of the 2022-2025 rally.
- 4800 also approximates the former bull market peak, which topped out in January 2022.
- Ichimoku weekly cloud support lies right near the same levels.
S&P 500 Index
SPX Advance/Decline has gotten “washed out”
The total SPX Advance/Decline (A/D) has now reached the lowest levels since 2022. Thus, it’s difficult to call this a mild correction anymore. The selling pressure of the last week has resulted in more serious technical damage, which has adversely affected momentum.
Interestingly enough, momentum indicators like MACD are showing positive divergence and lie at higher levels, having not plunged to new monthly lows to mirror price.
Thus, this positive divergence is seen as a bullish sign following A/D falling to the lowest levels in three years.
S&P 500 Breadth – Advance Decline
Percent of SPX above the 20-day moving average dropped to single digits, yet momentum is showing positive divergence
Similar to the Advance/Decline, the percentage of SPX names above their 20-day moving average (m.a.) has pulled back to 5%.
This is the lowest level in three years, signifying a very big “washout” in market breadth.
However, similar to the prior Advance/Decline chart, there exists positive divergence in the momentum indicators which track this gauge.
Given other popular indicators like McClellan’s Volume, Oscillator has also reached extreme levels on the downside.
Overall, market breadth is indicating that lows should be around the corner.
S&P 500 Breadth – Percent Above 20 Day Moving Average
