Green Shoots for Stocks?
- Peter Lee
- Apr 5, 2022
- 3 min read
The term green shoots refer to plant growth and recovery. It describes plants showing signs of early life or in the process of revitalizing and renewed growth. It is also a metaphor to describe early signs of an economic recovery or improving economic conditions during an economic downturn. Norman Lamont, the former Chancellor of the Exchequer of the United Kingdom, first used the term to describe signs of an economic turnaround from the 1991 recession.
Green shoots for stocks also describe a change in market sentiments, market internals, supply/demand equilibrium, and other technical indications to suggest the correction or bear decline is over, and stocks are ready to climb back to their previous highs.
Are the market actions over the past month signaling the 3-month correction is over? Are green shoots signaling the resumption of the structural bull market?
Some of the analyses below suggest the SPX Index (SPX) may be showing early signs of a bottom and the start of a sustainable recovery (green shoots).
Bar chart/volume analysis
A cup and handle pattern has developed over the past three months. It is technically a constructive formation that indicates a potential bottom and the resumption of the primary trend (structural bull).
A convincing move above 4,595-4,637 ( Feb and Mar 2022 highs) helps confirm the breakout and solidifies the 2/24/22 low (4,114.65) as a market bottom. The breakout suggests the next move is to the upside. A technical base of 480.66-points signals the next SPX rally to 4,818.62 (1/4/22 all-time high) and above this to 5,076 (breakout projection).
Although a pullback is still possible, the 200-day ma (4,488) and the 50-day ma (4,416) act as crucial initial support. Failure to maintain support suggests a retest of 4,290 or the Jan 2022 downtrend breakout. The Feb/Mar 2022 lows at 4,116-4,158 remain pivotal support. Violation here confirms a breakdown and the start of the next major SPX
decline.
Ichimoku Cloud analysis
The moving-average-based trend method is one of the more comprehensive technical indicators that can help visualize the price action. It has become popular among forex traders as a forecasting tool. Unlike other technical indicators, Ichimoku is viewed as a leading indicator since the only looking back components are the moving averages. Two other elements - the cloud and the lagging line can forecast forward momentum and future support and resistance.
The ability of SPX to surpass the 50-day and 200-day moving averages and the cloud improves technical conditions. When the price is above the cloud, it hints at SPX improving or beginning to trend up. The ability to stay above the cloud also suggests that the cloud can act as pivotal support on pullbacks.
However, the cloud is trending lower in the opposite direction of the recent SPX price trend. The divergence warns that there may be further choppy and volatile actions over the near term before the cloud can trend up. On a positive note, the forward support (4,376) and resistance (4,472) plotted 26-periods ahead are turning up, offering early signs of a potential bottom, and improving future trend direction and momentum.
GoNoGo analysis
The GoNoGo indicator is a simple technical tool that utilizes color-coded signals to identify trends. The Go/No-Go indicator identifies buying and selling situations by combining momentum type readings with statistical measures.
SPX began to show technical signs of a potential bottom on 3/18/22, one day after the Jan 2022 downtrend breakout as the bar turned amber. Four trading days later, on 3/24/22, the color turned to the aqua bar, signaling the SPX at “Go” conditions.
Despite the impressive rally over the past few weeks, the GoNoGo indicator shows no signs of reversing down. The evidence now suggests the momentum and trend are moving toward the start of a new uptrend. The caveat to this call is that it needs to sustain the blue and aqua colors on any pullbacks.
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