Friday saw heavy trading with the SPDR® S&P 500 (NYSE:SPY) rising +2.5% on heavy volume with share volume up +117% higher than the typical daily trading volume, while SPY did just barely close above the 200 MA the benchmark (SPX) did not, is it time to buy?
The widely followed benchmark is still technically oversold still even after Friday's late day gamma squeeze, with technicals being deeply oversold in the short term, odds would normally favor long trades.
However, dip buyers have been brutally punished in January as stocks gave back gains with the S&P 500 slipping -7.92% from its respective 52 week highs but still down -6.95% so far in 2022, while the tech heavy NASDAQ has fallen -13.92% from its 52 week high amidst a breakdown in multiple metrics of market breadth.
The S&P 500 has held up rather well compared to small caps and the NASDAQ considering the heavy selling that has gripped the market so far this year.
The NASDAQ needs to rise +6.5% to recapture the 200 day moving average which has caused significant chart damage technically and casts a shadow over the rest of the market. However, by drawing Fibonacci levels into the S&P 500 for instance, shows us that the benchmark rebounded after testing the typical retracement level of the 38.2% Fibonacci, a classic retracement level that nearly always alleviates short term over-sold conditions, is it temporary? Will the bounce last?
Here's the visual:
Disclosure: Members of our options trading group have been short the SPY ETF since 471.88 and locked in profits near $421, just pennies from the bottom which coincides with the 38.2% Fibonacci level...
A continued failure for the SPX to close back above the 200 MA level would increase the likelihood of a deeper correction with the potential to re-test the 50% Fibonacci confluence near 4,016. Should that level not hold, the next major support is near the 61.8% Fibonacci confluence near 3796.
After Friday's late day gamma squeeze a lot of traders may think the worst is over with the SPX nearly reclaiming the widely followed 200 day moving average (SPY actually did close above the 200 MA Friday). And while recapturing that level would be a positive development, many seasoned traders will be wary of the relentless push higher on Friday and recall that during bear markets, a gamma squeeze after so many down days should be viewed in the context of nothing more than a typical bear market rally. While we are not yet in a bear market using typical metrics, traders psyche has notably shifted.
Investors have been selling the rips instead of buying the dips as of late. This recent change of market psychology could manifest into a deeper correction should the widely followed benchmark be unable to reclaim and hold the 200 day moving average.
Market breadth (NYSE) has already broken chart support and even though indices have bounced, the deterioration in market breadth is likely an early indication of lower prices ahead, with more than 1/2 of the S&P 500 stocks trading below their respective 200 day moving averages.
For this reason the rebound we saw on Friday should be viewed as another failed attempt for the market to repair the technical damage that has been inflicted. The odds are increasing that the major indices will likely need to re-test last week's lows at the least before a meaningful bottom can begin to repair the technical damage that has been done to the S&P 500, NASDAQ, and even the DOW.
On a positive note, the index did print a hammer candle on Friday on very high volume. Bulls will want to see that (1) one day candlestick confirmed with a higher low and higher high candlestick on Monday, (one day candlestick patterns should be looked at rather subjectively). Should the S&P 500 recapture and continue to hold the 200 day moving average, then the next technical level to overcome would be to reclaim the 50 day moving average currently near 4635.