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Are Stocks Vulnerable to Additional Selling?


Stocks have become increasingly volatile and erratic. Market indexes appear to have peaked during Nov 2021 (i.e., COMPQ, NDX, MID, SML, Technology, Growth stocks, etc.) or Jan/Feb 2022 (SPX, INDU, NYA, etc.). Geopolitical concerns (i.e., the Russia-Ukraine war), macro-economic uncertainties (Fed and central banks' monetary policies), and structural changes (i.e., inflation/super commodities cycle, stagflation, recession, interest rates, etc.) continue to dominate investors' mindsets. The lack of discernable and sustainable trends in the marketplace has also kept investors on the sideline.


Enclosed below are technical updates to popular stock market indexes, including S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), and Nasdaq Composite Index (COMPQ). Investors need to keep abreast of pivotal support and resistance levels, critical technical patterns, and moving averages as they can help identify the next directional trends.


S&P 500 Index (SPX – 4,393.66)


A head and shoulders top pattern has developed in SPX over the past year, suggesting the potential for a major top. However, the lack of symmetry suggests further work is necessary before the next technical breakout or breakdown. The left shoulder took 7-months to develop, while the right shoulder is only 3-months and counting. Symmetry in a formation is not mandatory, but a symmetrical pattern can lead to firmer market response. Four (4) more months would help to solidify the right side.


A convincing surge above the left and right shoulders at 4.546/4,732-4,744 and 4,595-4,749 negates the distribution top and signals a rally to 4,818.62 (1/4/22 all-time high and head). New highs hint at the next 596/703.97-point rally toward an SPX target at 5,415-5,22.5. Violation of the two necklines below 4,222.62/4,114.65 confirms a major SPX top and the start of an SPX sell-off toward 3,411-3,627.


On a near-term basis, another negative outside day has developed on 4/21/22. This is the fourth negative outside day in the past twelve-trading days. Also, two gap-downs (4/6 and 4/11/22) have developed within the same timeframe. Interestingly, the 4/21/22 daily reversal pattern occurred near the 200-day ma (4,497). The failure to clear above the 200-day ma, followed by an intra-day reversal below its 50-day ma (4,413), warns of increased selling pressures. The rolling over of the two moving averages, if confirmed, substantiates a trend reversal to the downside.


Short-term trading support is 4,365-4,370 (2/14 and 4/18/22 lows) and below this to 4,287-4,279.5 (1/25 and 3/1/22 lows). Critical support is 4,222.62/4,114.65-4,157.87 (1/24, 2/24, and 3/8/22 reaction lows). A breakdown reaffirms the 1/4/22 peak (4,818.62) as a market top and can trigger the next SPX sell-off to the mid-to-high 3,000s.


Dow Jones Industrial Average (INDU – 34,792.76)


Like SPX, INDU has also shown a large and complex head and shoulders top pattern in the past year. The distribution type pattern is not complete. However, the multiple left shoulders (four) and right shoulders (two) warn of further selling pressures. The left shoulders at 35,091.5-35,564 and the right shoulders at 35,372-35,824 provide formidable resistances. A death cross sell signal on 3/7/22 also warns of a trend reversal favoring the downside.


Interestingly, there are also two necklines. The first neckline is 33,150-33,613, coinciding with the May, June, and Sept 2021 and Jan 2022 lows. The second neckline is 32,071-32,273, or the Feb and Mar 2022 higher lows. A breakout above 36,942.65 (1/5/22 all-time high) hints at the next 3,802.32/4,680.01-points rally, rendering INDU targets toward 40,745-41,633. A breakdown below 33,15-33,613 (first neckline) and 32,071-32,273 (second neckline) confirm the next INDU decline to 29,348/27,593.


The relative outperformance in INDU this year suggests investors may be favoring the safety and liquidity of blue-chip and well-capitalized names. The lack of symmetry between the four (4) left shoulders (9-month to develop) and the two (2) right shoulders (3-months) also suggests the outcome of the head/shoulders top pattern is still months away. It may take until the Oct-Nov 2022 timeframe before the confirmation of a breakout or breakdown.


Nasdaq Composite Index (COMPQ – 13,174.65)


COMPQ, NDX, technology, and growth stocks continue to sell off. COMPQ was the first index to warn of a top as it violated the bottom of its uptrend channel (14,980 - 1/6/22). A subsequent neckline breakdown below 13,179-14,182 (1/21/22), coupled with a death cross sell signal (2/17/22) suggests the 11/22/21 peak (16,212.23) is a major top.


An oversold rally in Mar 2022 quickly faded near 14,646.90 (3/29/22) or just below pivotal resistance at 14,681-14,988 (Nov 2021 downtrend, 61.8% retracement from Nov 2021-Mar 2022 decline, and 200-day ma. A complex 1-year head and shoulders top, with the left shoulders at 14,175-14,211.5/15,403 and the right shoulders at 14,509.5-14,647, warn of formidable selling.


The above bearish developments do not bode well for a sustainable recovery. COMPQ is likely to retest initial support at 12,974-13,095 (May 2021 and Jan 2022 lows) and below this 12,397-12,587 (Mar 2021 and Feb/Mar 2022 lows).


A breakdown here is technically significant as this can trigger the next major COMPQ sell-off to 12,074-12,108 (Nov 2020 breakout) and below this to 11,422 (50% retracement from Mar 2020-Nov 2021 rally), and 10,291-10,519.5 (61.8% retracement and Sept 2020 lows).


COMPQ must clear above its initial resistance at 13,686 (50-day ma) and preferably above pivotal secondary resistance at 14,509.5-14,988 (Feb/Mar 2022 highs or right shoulders, 200-day ma, 61.8% retracement from Nov 20221-Mar 2022 decline, and Nov 2021 downtrend) to signal a sustainable intermediate-term recovery. The rolling of the 50-day and 200-day moving averages, if not reversed, is further bearish trend developments that warn of significant downside risks ahead.


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

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