Does the Stock Market Bounce or Break?
The stock market ended the week in a precarious position.
On Thursday Minneapolis Fed President Neel Kashkari dropped the market when he said that there may be no rate cuts this year if inflation stalls.
On Friday the market staged a relief rally as Nonfarm Payrolls increased more than expected demonstrating a strong economy, yet wage increases were deemed non-inflationary.
Let’s do a deep dive to see if the conditions favor a continued uptrend or a correction.
Market Analysis
The S&P 500 (SPY) ended the week just below the 10 EMA. However, it did have the strength to retake and close above the 21 EMA, after ending the day on Thursday below the 21 EMA. Of the two moving averages, the 21 EMA is arguably more important as it has guided the uptrend since its start in late October 2023. Technical indicators favor a continuation of the uptrend as 1) Stochastics are oversold, 2)the Money Flow Index shows buying, 3) RSI is still over 50, and 4) the MACD Histogram is showing waning bearish pressure.
The dynamic cycles may be lengthening from 52 trading days to 54 trading days. The cycle brackets in the chart above reflect a 54-trading day cycle with a 27-trading day half cycle. We have to be open to the idea that the sudden drop on Thursday was just normal behavior at the end of a cycle bracket and that a new cycle bracket started on 4/4. We still need to see if this cycle will be a positive one or a negative one. If it is positive, it will trade above the 10 EMA and continue higher. If it is negative, it will fall back below the 21 EMA.
The Bearish case can be seen on the 2-hour chart for SPY. First, the Anchored Volume Weighted Average Price (orange line) from the 3/28 high is still downtrending and above the current price, telling us that sellers are still in control. Also, the rebound on Friday was basically a 62% Fibonacci Retracement, hinting that more downside is possible. Finally, the price is still below the 20 SMA (also the Bollinger Band Midpoint in grey).
The NYSE Advance/Decline Line (NYAD)appears to have worked off overbought conditions as it retraced to the Bollinger Band Midpoint (dotted red line). It is possible that the market bounces from here as the NYAD works its way back to the Upper Bollinger Band (solid red line). A bearish expectation breaker could occur if the NYAD falls further down to the Lower Bollinger Band. Both possibilities must be considered, and price action on Monday may confirm whether the uptrend continues or falters.
Turning our attention to volatility, our VIX indicators may be pointing to a rebound. Yes, the VIX (yellow line) popped last week as the stock market fell. However, the VIX is at a resistance level (black line)and may decline from here. The VVIX/VIX is another indicator that may be telling us that the worst is over. Typically, when the VVIX (volatility of the VIX)/VIX rises, the stock market rises and when the VVIX/VIX falls, the stock market falls. The VVIX/VIX hit a previous low point (green line) and appears to be reversing higher, which is bullish if it can continue higher. The VIX3M-VIX indicator is known to predict panic when the 3-month VIX (VIX3M) is lower than the 1-month VIX (VIX). This is often referred to as the “Vix Curve”. However, in Bull Markets, this indicator tends to flirt with the 1 mark, scare the pants off everyone so people buy puts, and then reverse higher as the stock market rises. This rinse-and-repeat dynamic may be in play as the VIX3M-VIX touched the 1 mark and reversed higher. Time to roast the Bears perhaps?
The Nasdaq 100 may lead the stock market higher if it continues to bounce from the 50 SMA. However, it is still below the 10 and 21 EMAs so Monday’s price action will be crucial. The rise in the Money Flow Index and a significant volume bar on Friday show interested buyers. Similar to the SPY, we lengthened the cycle bracket to 56 trading days, with 28 trading day half-cycles. Given this change, a new cycle may begin on 4/9 and we should be open-minded to the idea that it could be a positive one. If it is, it could provide another risk-on rally for the entire stock market.
Finally, the Russell 2000 (IWM) is at the lower channel line, suggesting that it is ready for a bounce. This comes right when the cycle bracket (unchanged) starts a new cycle on 4/4. The positive Money Flow Index also reflects significant buying. If IWM rallies from here it would make the next possible leg of the rally a broad rally with participation from mid and small-cap stocks as well. Alternatively, if the price drops below the lower Channel Line, that could confirm the next cycle will be bearish.
Conclusion
Next week’s price action will determine if this rally continues or if bearishness persists. The age of the Intermediate Cycle (rally now 22 weeks old, whereas Intermediate Cycles tend to last 18 to 27 weeks) favors the Bears. Breadth and Volatility indicators favor the Bulls. If the rally continues, a resurgence in the Nasdaq100 and Russell 2000 may make it a strong risk-on rally. We’ll need to wait and see what next week brings.
For Paid Subscribers we’ll go over Cycles and Setups. We’ll even discuss a cycles warning coming from a professor in the 1920’s that had a method to identify price highs for the year.
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