Short to long term analysis of the SPX
تم تحديثه
In my last post I outlined the potential of a near-term breakdown of price action as the SPX was moving in a Bearish pennant consolidation pattern, The SPX has now developed into a more classical bear flag continuation pattern. We can see that the downwards trendline is holding price action, and that the bearish pennant has turned into a more typical bear flag continuation pattern presenting itself with higher highs and lower lows.
I expect a breakdown of price action to present itself soon. More specifically closer to 3890 levels forming a double top with the price action of mid to late December followed by a breakdown below the bear flag trendline. The levels of around 3890 coincides fib retracement level 0.382 from the mid December top. Although price action could very well breakdown before said double top target is reached as well as below it.
A note on the indicators used, feel free to skip if you are already aware of their functionality and usage:
To explain the log-adjusted regression line, it shows price action plotted on a red linear regression line, which is also log-adjusted for use in particularly longer periods of price action. The blue line to upside and downside is respectively 2nd standard deviations above and below the linear regression. Price of a symbol can be considered more expensive on average, relative to all price-action from the point that the reg-line is plotted, if the price is above the reg-line whilst the opposite is true if the price is below the reg-line where the extremes of both cases are indicated by reaching the 2nd standard deviation of either side i.e. the blue lines.
Also to quickly explain the EMA ribbon, which is the red to yellow lines that are weaving in-between price action. These are 8 exponential moving averages from the length 20 to 55 in increments of 5. These can be used as indications for a number of things. They can act as support and resistance if price action is respectively coming down against the ribbon or moving up to the ribbon. And as I'm using them in this post, they can signal trend continuation and potential trend shifts. Whereas price action being below and above the ribbon signaling a continuation of the trend on that particular time frame.
There are factors that further validate the signaling of a continuation trend and these are if price action is to the either side of the ribbon for an extended period of time as well if price action is far below or above the ribbon. If price action falls below the ribbon or rises above the ribbon it can signal a potential trendshift, and then the same validating factors apply for the potential continuation of the trend. The EMA ribbon is generally more valuable for trend analysis on higher time frames, days to weeks as these are more validating for long-term trend continuation signaling.
Here is a graph of the SPX showcasing all trend shift signals, from the period of January 2022, on the daily chart using the EMA ribbon
As you can see there are also examples of false breakouts and breakdowns, where price action moves below and above the ribbon but does not continue in that trend. It is here where, if you were to solely use the EMA-ribbon, validating factors for a trend continuation comes in place. Which described earlier are when price action is developing in an extended period of time, rather than a day or two on the daily graph, to the side it has broken into. And a validating factor that can also be used is if price action significantly extends to the side which it broke into. This is one of the reasons that I also expect a continuation of the current downwards trend to significantly lower price action. I would also have a reason to reconsider my conviction if for example price action broke out above the ribbon and stayed above it for an extended period of time.
Keep in mind this is also a bit of a simplification as well as my interpretation of the usage of these indicators, so if you are interested I recommend you to read up more on the topic of these indicators. However, it is important to note that no indicator is perfect and, if they are to be used, they should be used as part of a larger trading strategy.
To add some thoughts and ideas that may dispute my conviction of a breakdown of price action, We have corporate bonds which generally speaking can be considered as "smart money" and be used as a divergence signal to the SPX. If you look at LQD which is the major Investment-grade bond ETF. We can see that it is picking up some steam and not showing short-term bearish divergence which one would be to expect during a bear flag pattern. Although it is also not showing a bullish divergence. It rests right now in the middle of the EMA ribbon on the daily chart, if it were to jump to the upside showing a bullish divergence to the SPX that would cause further invalidation of a short-term breakdown in price action and the opposite as well if it were to break to the downside.
You could also make the argument that since bonds have fallen so much compared to the SPX it is bound to pick up, as is the nature of money going from less-secure asset classes such as equities to more secure asset classes such as high-grade corporate bonds and treasury bonds (more the latter) during recessionary periods. Here is a chart showcasing the LQD relative to the SPX (LQD/SPX)
As you can see corporate bond prices have fallen significantly relative to the SPX ever since the 2008 financial crisis rising substantially only during covid. Also very interestingly the relative price has only reached the -2 standard deviation on the log-adjusted reg line one time during its entire price action history. It was in April of 2022. The only other time were it even came close to the -2 standard deviation was during the market peak mid 2007 approximately 1 year and 3 quarters before the absolute bottom of the '2008 financial crisis' Despite the fact that the corporate bond ETF LQD was at its highest price action during post covid it still reached the second -2 standard deviation relative to the SPX which truly highlights how overvalued the stock market is relative to bonds. A very similar, arguably worse, graph is shown with treasury bonds relative to the SPX (TLT/SPX).
This highlights the very real potential for bond prices to rise extremely high relative to the SPX, more likely treasury bonds than corporate bonds. But either way it highlights how much downwards potential there is for price action for the SPX.
I would also like to note that the LQD corporate bond ETF fell approximately -29% from its peak to the low in 2022, LQD also fell -29.5% during its lowest in the 2008 financial crisis. Compare this to the SPX which had its low in 2022 of approximately -28% from its peak and its low during the 2008 financial crisis which was approximately -57.5%. Corporate bonds are considered a lot more resilient than the SPX in periods of economic downturn. The idea that investment grade corporate bonds have bottomed lower than the SPX has historically not happened before which is highlighting my belief that the SPX still has a long way down to go.
LQD can also be seen as a lagging indicator meaning as the LQD recovers from its bottom, SPX has most likely not reached its bottom but will eventually do so as well. For example LQD reached its bottom during the 2008 financial crisis at the beginning of October of 2008 whilst SPX reached its bottom in the beginning of March 2009 approximately 5 months apart from each other. If you were to make an exact comparison to the 2008 financial crisis which LQD has bottomed (so far) to similar levels -29% vs -29.5% that would mean that the SPX would reach its bottom price action at 24th of march 2023. Mind you this is an exact comparison and markets generally do not tend to behave in this exact way regarding time periods, but it is interesting to compare.
The US10Y price action have mostly an inverse correlation to the SPX, And unlike the LQD it is actually showing a potential bullish divergence to the SPX where it recently went below the EMA ribbon on the daily showing a potential trend shift although it would probably need more price action to the downside to validate the potential trend shift.
I would not put as much value to this though as I would to the LQD. The reason being is that as time goes on the us10y will go down as inflation eventually comes down. whilst the LQD is an indicator that in my opinion can measure institutional investors as well as companies expectations for further corporate expansion. This is due to the fact that investment-grade corporate bond prices are partly dictated by corporates issuing new bonds, demand for corporate bonds by investors as well as expectations of the ability to generate future profits.
Regarding overall price action I'm firmly bearish for the long-term (months) with the SPX and QQQ even at these levels which some, especially the latter, may consider very low. But to give some perspective, this is a log-adjusted regression line from the end of 2021 to now for the QQQ.
The graph displays current price for the QQQ is firmly in the middle of the Reg line showing considerable short-term potential downside
To display even longer price action here is log-adjusted reg line from approx 1995 to now of the SPX
As you can see, there is significant potential for downwards price-action. I believe price action will most move closer to the -2 deviation of the reg-line if not reach it. This is under the assumption that a recession to the scope of my belief will occur (more on that in a future post).
This is log-adjusted reg line for the entire price action history of the QQQ showing similar downside potential
On a fundamental note a very important event is coming up at the end of the month (January 2023) which I believe regardless of future price-action until then will cause a massive fall in price action for the SPX, mainly Q4 earnings for 2022. I will discuss that as well in a future post.
As I finish this post I would like to thank you, the reader, for reading this, as this is my first post going into a more in-depth discussion regarding the market, more to come. I would also like to thank Trading view creator spy_master for inspiring me to make this post, as well as inspiring me with his market analysis and methods. I highly recommend you check out his posts if you have not already.
F.Y.I not financial advice.
I expect a breakdown of price action to present itself soon. More specifically closer to 3890 levels forming a double top with the price action of mid to late December followed by a breakdown below the bear flag trendline. The levels of around 3890 coincides fib retracement level 0.382 from the mid December top. Although price action could very well breakdown before said double top target is reached as well as below it.
A note on the indicators used, feel free to skip if you are already aware of their functionality and usage:
To explain the log-adjusted regression line, it shows price action plotted on a red linear regression line, which is also log-adjusted for use in particularly longer periods of price action. The blue line to upside and downside is respectively 2nd standard deviations above and below the linear regression. Price of a symbol can be considered more expensive on average, relative to all price-action from the point that the reg-line is plotted, if the price is above the reg-line whilst the opposite is true if the price is below the reg-line where the extremes of both cases are indicated by reaching the 2nd standard deviation of either side i.e. the blue lines.
Also to quickly explain the EMA ribbon, which is the red to yellow lines that are weaving in-between price action. These are 8 exponential moving averages from the length 20 to 55 in increments of 5. These can be used as indications for a number of things. They can act as support and resistance if price action is respectively coming down against the ribbon or moving up to the ribbon. And as I'm using them in this post, they can signal trend continuation and potential trend shifts. Whereas price action being below and above the ribbon signaling a continuation of the trend on that particular time frame.
There are factors that further validate the signaling of a continuation trend and these are if price action is to the either side of the ribbon for an extended period of time as well if price action is far below or above the ribbon. If price action falls below the ribbon or rises above the ribbon it can signal a potential trendshift, and then the same validating factors apply for the potential continuation of the trend. The EMA ribbon is generally more valuable for trend analysis on higher time frames, days to weeks as these are more validating for long-term trend continuation signaling.
Here is a graph of the SPX showcasing all trend shift signals, from the period of January 2022, on the daily chart using the EMA ribbon
As you can see there are also examples of false breakouts and breakdowns, where price action moves below and above the ribbon but does not continue in that trend. It is here where, if you were to solely use the EMA-ribbon, validating factors for a trend continuation comes in place. Which described earlier are when price action is developing in an extended period of time, rather than a day or two on the daily graph, to the side it has broken into. And a validating factor that can also be used is if price action significantly extends to the side which it broke into. This is one of the reasons that I also expect a continuation of the current downwards trend to significantly lower price action. I would also have a reason to reconsider my conviction if for example price action broke out above the ribbon and stayed above it for an extended period of time.
Keep in mind this is also a bit of a simplification as well as my interpretation of the usage of these indicators, so if you are interested I recommend you to read up more on the topic of these indicators. However, it is important to note that no indicator is perfect and, if they are to be used, they should be used as part of a larger trading strategy.
To add some thoughts and ideas that may dispute my conviction of a breakdown of price action, We have corporate bonds which generally speaking can be considered as "smart money" and be used as a divergence signal to the SPX. If you look at LQD which is the major Investment-grade bond ETF. We can see that it is picking up some steam and not showing short-term bearish divergence which one would be to expect during a bear flag pattern. Although it is also not showing a bullish divergence. It rests right now in the middle of the EMA ribbon on the daily chart, if it were to jump to the upside showing a bullish divergence to the SPX that would cause further invalidation of a short-term breakdown in price action and the opposite as well if it were to break to the downside.
You could also make the argument that since bonds have fallen so much compared to the SPX it is bound to pick up, as is the nature of money going from less-secure asset classes such as equities to more secure asset classes such as high-grade corporate bonds and treasury bonds (more the latter) during recessionary periods. Here is a chart showcasing the LQD relative to the SPX (LQD/SPX)
As you can see corporate bond prices have fallen significantly relative to the SPX ever since the 2008 financial crisis rising substantially only during covid. Also very interestingly the relative price has only reached the -2 standard deviation on the log-adjusted reg line one time during its entire price action history. It was in April of 2022. The only other time were it even came close to the -2 standard deviation was during the market peak mid 2007 approximately 1 year and 3 quarters before the absolute bottom of the '2008 financial crisis' Despite the fact that the corporate bond ETF LQD was at its highest price action during post covid it still reached the second -2 standard deviation relative to the SPX which truly highlights how overvalued the stock market is relative to bonds. A very similar, arguably worse, graph is shown with treasury bonds relative to the SPX (TLT/SPX).
This highlights the very real potential for bond prices to rise extremely high relative to the SPX, more likely treasury bonds than corporate bonds. But either way it highlights how much downwards potential there is for price action for the SPX.
I would also like to note that the LQD corporate bond ETF fell approximately -29% from its peak to the low in 2022, LQD also fell -29.5% during its lowest in the 2008 financial crisis. Compare this to the SPX which had its low in 2022 of approximately -28% from its peak and its low during the 2008 financial crisis which was approximately -57.5%. Corporate bonds are considered a lot more resilient than the SPX in periods of economic downturn. The idea that investment grade corporate bonds have bottomed lower than the SPX has historically not happened before which is highlighting my belief that the SPX still has a long way down to go.
LQD can also be seen as a lagging indicator meaning as the LQD recovers from its bottom, SPX has most likely not reached its bottom but will eventually do so as well. For example LQD reached its bottom during the 2008 financial crisis at the beginning of October of 2008 whilst SPX reached its bottom in the beginning of March 2009 approximately 5 months apart from each other. If you were to make an exact comparison to the 2008 financial crisis which LQD has bottomed (so far) to similar levels -29% vs -29.5% that would mean that the SPX would reach its bottom price action at 24th of march 2023. Mind you this is an exact comparison and markets generally do not tend to behave in this exact way regarding time periods, but it is interesting to compare.
The US10Y price action have mostly an inverse correlation to the SPX, And unlike the LQD it is actually showing a potential bullish divergence to the SPX where it recently went below the EMA ribbon on the daily showing a potential trend shift although it would probably need more price action to the downside to validate the potential trend shift.
I would not put as much value to this though as I would to the LQD. The reason being is that as time goes on the us10y will go down as inflation eventually comes down. whilst the LQD is an indicator that in my opinion can measure institutional investors as well as companies expectations for further corporate expansion. This is due to the fact that investment-grade corporate bond prices are partly dictated by corporates issuing new bonds, demand for corporate bonds by investors as well as expectations of the ability to generate future profits.
Regarding overall price action I'm firmly bearish for the long-term (months) with the SPX and QQQ even at these levels which some, especially the latter, may consider very low. But to give some perspective, this is a log-adjusted regression line from the end of 2021 to now for the QQQ.
The graph displays current price for the QQQ is firmly in the middle of the Reg line showing considerable short-term potential downside
To display even longer price action here is log-adjusted reg line from approx 1995 to now of the SPX
As you can see, there is significant potential for downwards price-action. I believe price action will most move closer to the -2 deviation of the reg-line if not reach it. This is under the assumption that a recession to the scope of my belief will occur (more on that in a future post).
This is log-adjusted reg line for the entire price action history of the QQQ showing similar downside potential
On a fundamental note a very important event is coming up at the end of the month (January 2023) which I believe regardless of future price-action until then will cause a massive fall in price action for the SPX, mainly Q4 earnings for 2022. I will discuss that as well in a future post.
As I finish this post I would like to thank you, the reader, for reading this, as this is my first post going into a more in-depth discussion regarding the market, more to come. I would also like to thank Trading view creator spy_master for inspiring me to make this post, as well as inspiring me with his market analysis and methods. I highly recommend you check out his posts if you have not already.
F.Y.I not financial advice.
ملاحظة
Comment:SPX closed at 3895 on Friday, signaling a potential trendshift or a false breakout using the EMA ribbon on the daily chart,
It could be similar price action to the other three false breakout points during 2022 or it could be a potential trendshift.
On the weekly chart Its resisting of the EMA ribbon ribbon
My conviction is that price action will develop similarly to the other false breakout points, but my conviction could likely change if we see continued prolonged price action at the 3900 levels and above, where the 0.5 FIB acts as support on the weekly. Thursdays inflation report will be a big factor. A counter argument to my conviction is the very aggressive move to the upside that LQD underwent on
Friday,
generally speaking during the other false breakout points LQD gave bearish divergence signals to the SPX, this time it was more or less a bullish divergence. This is be a lot more validating to a potential trendshift. But there is also the point that was mentioned earlier in my post regarding the idea that bonds may have bottomed and are bound to move up relative to the SPX as money flows from less secure assets classes to more secure. As well as bonds having undergone a significant bigger downside during 2022 relative to the SPX.
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