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End of the Quarter and Month

It has been a volatile quarter as stocks plummeted and then rebounded from correction and bear market territories. Investors faced numerous headwinds. The year started with rising interest and inflationary pressures. A war in Europe between Russia and Ukraine and the continuation of the supply chain constraints have intensified global inflation. Inflation soared into the quarter, forcing the Fed to implement a 25-basis point hike and wind down its bond purchases. Fed's pivot toward a tighter monetary policy and concerns about a policy mistake leading to a recession spooked investors. COVID-19 pandemic continues, with the highly contagious Omicron subvariant BA.2 becoming the dominant strain.


With the above conditions, it is no surprise that it has been a volatile quarter. Market indexes plummeted and then rebounded from correction and bear market territories. Various economic reports released today show continued rising inflationary pressures. President Biden’s plan to release millions of barrels of oil from the strategic oil reserves sent the WTI crude tumbling lower. Stocks ended the quarter and the month trading in negative territories, marking the worst quarter since the first quarter of 2020.


Most major indexes declined in the first quarter. NYSE Composite Index (NYA) was the best performing of the indexes (-3.22% QTD), INDU (-5.21% QTD), MID (-5.52% QTD), SPX (-5.55% QTD), SML (-6.94% QTD), NDX (-10.08% QTD), and COMPQ (-10.18% QTD). On the sector front it was not nearly as bad as the indexes, S&P Energy (XLE +40.42% QTD), Utilities (XLU +11.32% QTD), Materials (XLB +4.49%), Staples (XLP +4.43%), Healthcare (XLV +4.10%), Industrials (XLI +4.01%), Financials (XLF +2.87%), Real Estate (XLRE + 0.22%), Technology (XLK -3.74%), Communication Services (XLC -6.30%), and Discretionary (XLY -6.35%).


How does the next quarter look from a technical perspective?

Quarterly Chart Interpretation


The SPX Index (SPX - 4,530.41) ended on a weak note with a sharp decline today (-1.57%), closing down 5.55% for the quarter. An outside quarter has developed with the low (4,114.65) and high (4,818.62) eclipsing the low (4,278.94) and high (4,808.93) of the previous quarter.


An outside quarter is neither bullish nor bearish. It hints at widespread uncertainties among investors and suggests further technical work is needed to confirm the next directional trend.


The good news is SPX ended the quarter (4,530.41) above last quarter's low (4,278.94), and the mid-point (4,466.64) of this quarter's range. The bad news is the quarter broke a winning streak of seven (7) consecutive quarters of SPX gains. Volume expanded into the end of the quarter, evidenced by the high-volume breakout (red volume bar). The three (3) previous inside quarters (i.e., Apr 2018, Jan 2019, and Apr 2021) ultimately led to the continuation of the structural bull. Does this bullish development repeat during the second/third quarter of 2022?


Monthly Chart Interpretation


After generating a positive month in Dec 2021, a bearish negative outside month in Jan 2022 triggered a sharp correction as the SPX Index (SPX - 4,530.41) fell 703.97 points or -14.61%. The pertinent question remains - is this the start of a bear market or another deep correction. A review of the monthly chart offers a mixed reading. The 10-month ma (4,488.14) and 30-month ma (3,759.26) continue to trend higher, suggesting bullish longer-term trend implications. Nonetheless, the spread (728.88) between the two moving averages remains wide, signaling a moderately overbought condition that needs further consolidation.


On a positive note, SPX closed the month marginally above the 10-mo ma, preventing the rolling over of a key moving average and the resumption of the structural bull trend. Failure to convincingly clear above the Oct 2021 monthly high (4,608.08) also warns of a continued choppy and volatile trading range between 4,114.65 (Feb 2022 low) and 4,818.62 (Jan 2022). A broadening top or megaphone pattern has developed.


A broadening formation is typically bearish, characterized by rising volatility and the lack of a clear direction. Above the top of the pattern (5,061) confirms a breakout. Violation of the bottom of the pattern (4,047) confirms a breakdown. Since the height of the base is 703.97, a breakdown warns of an SPX decline to 3,353. A breakout renders an SPX target at 5,765.


Until the confirmation of the formation via a breakout or breakdown, SPX will likely continue to experience erratic price swings in either direction, at least from a near-to-intermediate term perspective.


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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