What Does the Market REALLY intend to do?
Remember the angst-ridden bad old days of teenage crushes? I certainly do, and I'm sure glad they're long over for me. But with three kids ages 13, 9, and 6, I have a feeling I'll be getting reacquainted with those days real soon.
When it came down to a crush, provided the object of your obsession was at least cordial to you, the question then became "Sure, she (or he) likes you...but does she like you like you?"
Attempts at analyzing your crush's behavior towards you- and others -for an answer to this question would often result in unconquerable insecurity and false senses of either elation or despair that could be set off by the slightest perception of a half-smile or half-frown.
Since the stock market bottomed out for the year in mid-June, a lot of traders have been crushing pretty hard on a steady rally that is presently two months old. Now we must decide whether we're really in a bull market, or if it's all just a bunch of bull. The fundamental information that influences the market's moves may lend some credibility to the bulls: Earnings have been mostly strong. Data suggests that inflation is easing, aided by aggressive measures in raising interest rates from the Federal Reserve. The most recent employment reports revealed that almost all jobs lost during the Pandemic have been recovered. Heady times indeed, but let's not get infatuated just because the market has shown us some friendliness of late. With certain economic and global headwinds that can stand in our way, we can't yet be certain whether or not the market merely likes us... or if it likes us likes us.
Despite the first six months of the year essentially being a bloodbath for the markets and much of the economy, there have been four fairly significant rallies over the first half of the year, including the one we're in right now. The market plunged to a new low on the year after each rally. The latest low of 362.17 in the SPY ETF, which tracks the S&P 500, made on June 17th, brought us to depths not seen in the previous 16 months. But if the pattern for the market basically since the calendar flipped to 2022 (the all-time high in SPY of 479.98 was achieved on January 5th, 2022; and it was basically all downhill from there) has been to reach new lows after each rally, what's to say that the current rally, which has been the longest thus far this year, and has allowed the market to recoup more than half of its 2022 losses, won't be followed by further heartbreak?
While it's just as certain as death and taxes that the market will eventually make another move lower, it remains to be seen whether or not we're now in an up-trending, dare we say Bull, market that will occasionally pull back; or if the bottom will once again cruelly fall out from underneath as we ply new lows. Or maybe both the best, and worst case scenarios have all been shaken out of the market and we're set up for a fertile two-way trading market for the time being. Anything is possible but in order to try and gauge what the immediate future holds, we can examine the current rally against this year's previous rallies, while looking towards technically significant areas on the charts as touchstones that support our ways of thinking.
The chart above illustrates 2022's four rallies thus far. Notice how each time the market rallied, it sold off to a new low below the point that the previous rally started from. This is a sign of overall weakness and downward pressure on the market.
Rally 2's slight violation of the most immediate area of resistance with no follow-through, followed by a steeper sell-off than the one that came between the first two rallies was a fairly clear sign that the momentum at that point in time was decidedly lower and that the trend in the overall market was definitely pointing down: a certain bummer for bulls expecting some requited love from the market.
The difference from Rally 3's bottom of 380.54, to the ultimate low of 362.17 that kicked off Rally 4, was 5%. The somewhat tamer decline than the one that preceded Rally 3, might have been a source of some comfort as a sign that the market's drop was at least not accelerating. From there, the market stabilized and began its climb. Ah, but we had seen climbs from the lows before and no time in 2022 did the gains sustain. So, what makes us believe that the current rally will show us anything different?
In this case, SPY broke the most immediate area of resistance, which was the high after Rally 3, and it managed to get above the next area of resistance, which was the last highs before the low that Rally 3 sprung from. The high of the current rally was 431.71 on August 16th, only $2 above the Resistance 2 high of 429.66, and the market has since backed off a bit over the course of the trading sessions that followed. With that being said, one can construe the fact that SPY has so far stalled since passing through the second area of resistance as a sign that the rally as we know it has ended. That remains to be seen, but it also stands to reason that if SPY can hold and rise off of key areas of support that were established during the rally, and which we also see on the chart to the left, then there may be some sustainable buoyancy to the market after all.
Since making its high on August 16th, the market has pulled back a bit, with a 15% minimum corporate tax proposal and the Federal Reserve stating a possibility to further raise interest rates among the factors weighing on it. As with any market condition, the trader must be careful not become too invested one way or another until the market confirms its true intentions. For now, the market has shown resilience since making its low on June 17th by coming through two key areas of resistance, lending some plausibility to the bull case that the worst for the market may indeed be over. Since making its high off of the lows exactly two months later, signs of caution still abound. But as any seasoned romantic knows, you must stay focused on that which you desire without letting your emotions cause you to force the issue. Pay attention to how the market reacts as it approaches key areas of both resistance and support in order to better know what its longer-term prospects are.
Anyone who has ever had an intense crush on someone else knows that you can often see things that aren't there in an attempt to justify your own feelings. Every tiny motion or gesture from the desired individual can be mistaken for a sign of his or her true feelings. When we invest ourselves deeply into an opinion of the market, we tend to be oversensitive to reactions in the market that may not really be all that significant, which can lure us into irrational and unsuccessful trades. Instead of trying to extrapolate meaning from each and every zig and zag that market makes, the technical trader will more fully understand the market's desires by paying attention to how it reacts from resistance and support, or if it forms up on its own and makes new areas in between.
Yes, coming through two areas of resistance might be a bullish sign, but the fact that it came down for the time being immediately after coming through the second resistance area could be a bearish sign. So, whose thought process is correct? It all depends on which way the market goes as it approaches established areas. Approaching the market with this mindset will allow you to trade the market unencumbered by emotion and an opinion that may not be fully justified. In time, the market will make its feelings known based on the technical areas we all have in the charts that we use. This way, we can invest our time into the trades that are really there rather than worrying whether or not the market hates us, likes us, or likes us likes us.
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