MNI MARKET ANALYSIS - Shift in Techs, Sentiment Point to Potential Equity Reversal

Executive Summary

• A shift in the equity trend condition may suggest the uptrend in stocks has reversed this year
• Technical trend condition has shifted from bull phase to a bearish signal
• With a rising number of economic and sentiment indicators pricing in a significant deceleration in economic activity, Fed may disappoint by delivering fewer hikes than the market is currently expecting

S&P 500 Trend Indicators Flag A Broad Reversal In Sentiment

The E-Mini S&P 500 has been in an uptrend since Mar 23 2020. Since early January, however, a shift in the trend condition appears to have occurred that suggests the uptrend has reversed. The sharp sell-off in January has resulted in a key trend indicator reversing from a bull mode condition to a bearish one and price activity in February has reinforced this trend warning.

These technical signals coincide with a number of economic indicators pricing in a significant deceleration of economic activity in the US, leaving a number of asset classes - and most notably US equities - at risk ahead of a prolonged Fed tightening cycle.

Full piece on US macro indicators here:

USD Risk Reward - F.pdf

In 2021, we highlighted, on a number of occasions, the relationship between the following trend elements:

• The set-up between the 20- and 50-day exponential moving averages (EMAs) and the role these two averages perform in highlighting market sentiment.
• When a market is trending up, the two EMAs allow one to assess where on the chart, demand interest is likely to appear that will ultimately result in rising prices and a resumption of the uptrend - we use the term ‘buy-zone’. In a downtrend a ‘sell-zone’ is the relevant condition for trend purposes - areas on the chart where selling interest is likely to limit price gains.

In the chart below, the uptrend since Mar 2020 is clearly highlighted. A ‘buy-zone’ represents the price level on the chart at or below the 50-day EMA. In each of the corrective pullbacks during this major uptrend, demand for the contract, when price traded below the 50-day EMA, eventually delivered reversal of the preceding correction and importantly a resumption of the uptrend as price climbed to fresh cycle highs. During this bull cycle, the 20-day EMA remained above its 50-day counterpart. The only exception was for a brief period in October 2021. During this correction, price however quickly recovered from its lows in Sep / Oct to resume the uptrend.

The EMA condition has changed and it appears that this contract has moved from a bull cycle phase to a bearish one.

Source: Bloomberg/MNI

The key factors to note are:

• The set-up between the 20- and 50-day EMAs is bearish - a clear crossover has occurred following strong selling pressure in January.
• Price has recently recovered from its low of 4212.75 on Jan 24.
• This recovery however appears to be a correction and more importantly stalled at 4586.00 on Feb 2. The failure at 4586.00 is important because:
  • It highlights a failure above the 50-day EMA.
  • The EMA condition is bearish and price levels above the 50-day average highlight a ‘sell-zone’.
  • This means the ‘sell-zone’ condition is active and has restricted an appreciation in price.
  • A move below 4212.75, Jan 24 low would complete the ‘sell-zone’ requirement, confirm a resumption of this year's downtrend and importantly reinforce the conditions of a medium-term bearish cycle.
  • This would highlight potential for weakness below 4200.00 initially and also leave the 4000.00 handle exposed.

The confirmation of a downtrend and an active ‘sell-zone’ condition suggests that a deeper retracement of the last major bull cycle is possible. Fibonacci retracements flag 3801.97 as a level to watch should 4000.00 give way. This is the 38.2% retracement of the Mar 2020 - Jan 2022 bull phase.

To offset the bearish threat, price needs to initially confirm a convincing break of the 50-day EMA and set-up a challenge of this year's high at 4808.25 on Jan 4. Until then, a continued retracement of the last major bull cycle appears likely as market sentiment remains bearish.