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Bottom, Reversal, or A Temporary Low?

Stocks opened sharply lower but reversed sharply higher by the end of the day as the sanctions by the U.S. and Europe on Russia for the invasion of Ukraine were not deemed as harsh as many feared. It was a wild and volatile day as stock market indexes gapped down at the opening but staged a powerful reversal and erased all of their losses to end up with gains by the end of the day.


Technology and growth stocks led to the intraday market recoveries. The technology-laden Nasdaq Composite Index turned a 3.5% loss into a 3.3% gain. The biggest market-cap-weighted names in SPX and NDX or AAPL rebounded from its 200-day ma (151.25) to close up 1.67%. Other large-cap technology names such as MSFT, GOOG, and FB rebounded from their respective lows to record positive outside days. The battered Ark Innovation ETF (ARKK) also generated a positive-outside day reversing from down 5.15% in the morning to a gain of +7.79% by the close.


So, is this the stock market bottom, the start of a market reversal, or another temporary market low?


Many stock market indexes have broken below their respective 1/24/22 lows, with some indexes entering bear market territories on news of a full-scale Ukraine invasion. Markets are trading at oversold levels, and it is reasonable to expect near-term oversold rallies to occur. However, it is too early to confirm the market bottom and a green light for investors to return.


It appears U.S. stock indexes such as the SPX Index remains in a critical juncture as it has breached its pivotal 1/24/22 low of 4,222.62, trading down to an intraday low of 4,114.65, but closed at 4,288.70 or slightly above its prior Oct 2021 low (4,2798.94) and Jan 2022 pivotal low (4,222.62). It also tested the 38.2% retracement from Oct 2020 to Jan 2022 rally at 4,212.


Today’s market action is inconclusive, neither sufficient to confirm a technical breakdown nor a successful test of pivotal support, at least not yet. Stocks are at crossroads. The outcome will help decide the next directional trend.

The ability to find support here can trigger the next oversold rally. However, violation of the 4,212-4,223 would open the door for an SPX deep correction toward intermediate-term support at 3,723-3,950. It is crucial support coinciding with the 3/4/21 low, 38.2% retracement from Mar 2020-Jan 2022 rally, 61.8% retracement from Oct 2020-Jan 2022 rally, and the 2/16/21 high. Violation here is bearish as this puts SPX firmly into the threshold of a cyclical bear (-18% to -22.7%) with the potential for selling toward the 50%-61.8% retracements from Mar 2020-Jan 2022 rally or 3,195-3,505 (-27% to 33.7%).


Also enclosed are critical support zones for INDU, NYA, COMPQ, NDX, MID, and SML. Support levels are color-coded (burgundy, red, blue, and gold). Pay attention to the support levels coinciding with the burgundy color as violations here confirm market tops and signal the next selloffs to as low as the 61.8% Fibonacci retracements coinciding with the gold support levels.


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com


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