Technical trading entails price, market breadth, and sentiment. Below is an update to SPX Index based on price, breadth, and sentiment analyses.
Price remains one of the most crucial variables for technical trading. Price is often the final judge and jury. The long-term primary trend is more significant than the medium-term trend. The medium-term trend overrides the short-term trend. A price breakout or breakdown can offer insights into the next rally or decline.
Although there remain uncertainties about the COVID-19 Delta variant, inflation concerns, global economic headwinds, the S&P 500 Index (SPX) remains quite resilient as evidenced by the recent May to Jul 2021 rally of +8.30%. However, an overbought condition has led to the recent 3-day decline to initial support at 4,233.13 (7/19/21 low), coinciding with the 50% retracement from its 2-plus month rally. The pullback may have alleviated an overbought condition. Although SPX can fall to pivotal support at 4,164-4,185.5 (Jun 2021 lows and the 61.8% retracement), the ability to find key support at the 50% retracement suggests this is a normal consolidation (3-5%), and not a correction (5-10%), deep correction (10-20%), or bear decline (20% plus). The higher-low pattern is positive, but a convincing move above 4,356.5-4,375, and most important, 4,393.68 (7/14/21 all-time high) confirms the resumption of the primary uptrend. Violation of 4,164-4,185.5 warns of a retest of the May 2021 lows (4,056.88-4,061.41). A breakdown suggests the start of a prolonged and deeper correction.
Market breadth conveys market participation. The advancing issues minus declining issues indicator (A/D) is a popular measure of market breadth. Breadth analysis is a way to determine whether the rally or decline is either broad-based or narrow-based. When the market trades to new highs, a narrowed advance (weak A/D trend) warns of few stocks are participating in the rally. Conversely, a broadening or expanding market breadth (strong A/D trend) hints at a lot of stocks participating in the rally. A healthy and sustainable bull market trend suggests expanding market breadth as the A/D indicator confirms new highs as SPX also records price highs.
S&P 500 Index price (black dash line) continues to correlate closely to its advancing issues minus declining issues breadth indicator (i.e., black solid line). When the advance-decline line corrects, it has led to an SPX price correction. When the market breadth indicator expands, it has also led to an SPX rally. Although the SPX A-D line briefly violated its 50-day ma (7,222), it has rebounded from this pivotal support zone. The SPX price trend also rebounded from its crucial 50-day ma (4,245.5). A higher low in the SPX A-D line and SPX price trend is constructive. A higher-high via new all-time highs confirm the next sustainable bull trend.
Market sentiment is also called investor sentiment. Market behavior or market psychology can help understand the sustainability of trends and extreme market conditions. Investors are human beings, and as such, they are emotional creatures. Market sentiment studies convey the behaviors of market participants (i.e., retail, professional, smart money, informed, and uninformed investors). Generally, sentiment indicators can be bullish, bearish, or complacent. When everyone acts in the same way or adopts similar behaviors, this is called herd mentality, mob mentality, or herding. Because sentiment indicators are contrarian by nature, when most investors are extremely bullish, it implies a market may be nearing a peak and warns of an impending reversal. When most investors are bearish, the market may be nearing a bottom. A third scenario is a complacent market. Complacency is the direct result of the behavior of buyers and sellers becoming comfortable with the consensus view. Complacency is a necessary precondition of speculative bubbles. Numerous market sentiment indicators can track investment behavior. Among the widely used sentiment indicators are the AAII bull/bear survey, Wall Street Bull/Bear survey, % of stocks above ma, and VIX implied volatility index.
AAII Bullish sentiments is a retail investors survey published once a week. The AAII bears are 24.68%, AAII bulls are 36.17%, the AAII Bull/Bear ratio is 1.35, and the AAII Bull-Bear Spread is 9.36. Extremely bullish market conditions occur when the AAII Bull/Bear ratio rises to the 2.5 plus level, and the AAII Bull-Bear Spread trades toward the 30-40 area.
Wall Street Sentiment survey focuses on professional investors. The professionals are overwhelmingly bearish, as evidenced by the Wall Street bulls plummeting to a recent low of 8% and the Wall Street Bears skyrocketing to a high of 92%. Note the sharp divergence in sentiments between the retail and professional investors. So, the question is why the wide discrepancy, and who is correct?
VIX Index or the SPX Index implied volatility remains in a 1-year downtrend channel between 13.5 and 36. Below 13.5 hints of a VIX decline to 10-11.5 (2018, 2019, and 2020 lows). Above 36-37.5 warns of a VIX rally toward low-to-mid 40s. The converging 50-day ma (21.89) and 200-day ma (17.91) also suggests a continued trading range environment. On a near-term basis, a trading range is likely to develop between 15-16 and 25-29.
The % of SPX Stocks trading above 200-day, 150-day, and 50-day ma indicators are excellent and recording market breadth as well as market sentiments. Two of the indicators - the % of SPX Stocks trading above 200-day and 50-day ma, are bullish, showing higher-low patterns. On the other hand, the % of SPX stocks trading above 150-day ma shows a lower-low pattern.
University of Michigan Consumer Sentiment Index has rebounded strongly from its 2020 low (71.80). However, the consumer confidence survey may have peaked near the high-80s/low-90s or near its 30-week ma. Does this suggest the high growth of the past year may be behind us? Does this also imply the economic recovery is moving toward the mid-expansion phase?