A couple of consecutive closes or so on the S&P 500 over 4222 would increase the likelihood that the bear market is over. Conversely, a close below the June swing low near 3625 would also suggest the bear market hasn't run it's course yet. So, the market is at an important test right now as it consolidates under a confluence of overhead supply, the swing highs from June, and the 50% Fibonacci level for the year.
On Friday, investors woke up to the news that the Chinese military had taken a page out of the Russian version of the Art of War handbook and surrounded Taiwan under the guise of "scheduled military drills," very similar to Russia building up troops on the Ukraine border also under the guise of "pre-scheduled military drills."
The strong jobs report also overshadowed any hopes of the Fed not raising rates so aggressively. The fact that the S&P 500 shrugged off the recent negative developments by not gapping lower and keep going lower suggests that the market isn't ready to roll over just yet.
So, we got some pretty significantly negative geo-political news, and the market just finished flat except for Tesla (NASDAQ:TSLA), which was monkey hammered lower all day, diverging from the major indices. While the NASDAQ, Dow and the S&P 500 were all rebounding, TSLA investors sold the 3-1 news split, sending TSLA shares down 6.63% lower on Friday. So, is it time to pop the champagne? Not so fast. Let's look at the chart and see what it's telling us.
Stocks opened lower on Friday and, except for TSLA, got bid right back up and closed near the top of the overhead supply zone *red boxes," which the most recent one is 6 days old with the average one being 7-10 days to form before decidedly breaking lower.
While the "buying the dip" crowd did jump right back in, it isn't surprising considering traders are all watching the same pattern unfold and counting the daily candles trading range-bound inside those red boxes annotated above. I was also watching for a rebound at the lower end of the range but amidst the bearish geo-political backdrop decided to focus on shorting TSLA (via put options) for a test of the 877 level, which came to fruition a few hours later, giving our members a rather significant return for the day.
Friday, TSLA closed below the 10-day moving average, which is a sell signal according to basic principles of technical analysis. But a 1 day close below the 10-day still needs to be confirmed, so don't get a 2nd mortgage on your house to short TSLA based on that. The bulls need to see TSLA get some consecutive closes back above the 10-day moving average to negate that very basic sell signal.
One thing that stands out in the chart above is that each time the price consolidated within those overhead supply zones (red boxes), the market broke lower after a week. Will this time be different? Maybe, but the odds are that this time is not any different.
We are loaded up on stocks and are only holding about 20% cash, but hedge our portfolio with puts, as I'm sure everyone does. In the event my Elliott Wave count is correct, SPY is at wave five, and we should expect a garden variety a-b-c pullback to unfold next.
The widely followed benchmark SPY did a funny thing last week. Well, not so funny if you got suckered into the fake bearish shooting stars that were printed last week, which was only a ploy to suck in some more bears to only cause a painful short squeeze higher on Wednesday.
This was to be expected because the RSI had not yet reached overbought. Although it came close to that after Thursday's final squeeze higher, the fact remains that we typically see at least 2 attempts at reaching overbought readings before a pull-back, with the 2nd attempt being more problematic and oftentimes creating a negative divergence that has yet to materialize.
That having been said, the NASDAQ has thus far out-performed the S&P 500 since June, and that's what we want to see during a bottoming process. The QQQ has made a series of higher highs and higher lows and is now approaching an important test as the price is nestled right underneath a confluence of Fibonacci resistance and a down-trend line that has been in place all year.
If the NASDAQ can break and close back above 331 for QQQ, that would interrupt the bearish pattern of lower lows and lower highs which would increase the likelihood of a re-test of at least the 200-day moving average currently near 343 for the QQQ, take a look.
On a positive note, the 50-day moving average is starting to curl up, which is encouraging but still remains far below the 200 MA. Also, the RSI has a bullish divergence between price and the relative strength, so a breakout from here would be an encouraging sign, especially if the SPX followed along with a close above 4210 which would suggest that a bottom is attempting to form at these levels.
The SPY P&F chart signaled a double top breakout on Jul-19-22, suggesting a $495 price target as well. Although these P&F price objectives are encouraging, they can easily be negated. Any close below 404 on SPY would negate that target: Check out the P&F chart below.
Another encouraging sign is the P&F charts suggest a price objective for the QQQ of 364 (price is currently at 321.75), which suggests a +12% upside from Friday's close; any close below 404 in SPY would also negate that price objective. Here's the visual:
Disclaimer: The author is long stocks mentioned in this article TSLA, SPY, SPX & QQQ - Positions can change without any notice. This article is for educational purposes only. This article was originally featured in The Day Traders Journal.