SUMMARY

With the NDR Catastrophic Stop Model still in defensive mode and a policy change by the Fed, bullish confirmation is necessary to confirm last week’s tape action.

K-I-S-S

Whenever I am asked “what type of technical analyst are you,” I respond with a hearty, “I’m a meat and potatoes analyst.” I explain that I don’t incorporate “hundreds of indicators” as many technical analysts tend to do. In my opinion, this can lend itself to analysis paralysis. Instead, I try to keep things simple and easy—meat and potatoes. I tend to rely on internal equity market measuring tools, price, volume, relative strength, and sentiment. Are there other indicators? Yes, but most are simply a derivative of these. This is also why I appreciate Ned Davis Research, which bunches indicators into composite models—meat and potatoes. As my dad would remind me, “Son, keep it simple.”

Consistent with this, one of the themes we have discussed since late 2021 was about equity market volatility—“expect it and don’t be surprised by it, in both directions.” One way to measure price volatility is through the study of various volatility proxies. Please study the swings (percentage moves) in Figures 1 and 2.

Figure 1: Volatility Indices (SPX, NASDAQ 100). | I think volatility continues, especially considering what equity markets are contending with—geopolitics, inflation, central bank policy, supply chains, etc. Got any others?

Figure 2: Volatility Indices (Emerging Markets, Russell 2000). | I think volatility continues especially considering what equity markets are contending with—geopolitics, inflation, central bank policy, supply chains, etc.

BUY ON CANNONS, SELL ON TRUMPETS

“Buy on the sound of cannons, sell on the sound of trumpets” is attributed to Baron Rothschild. The quote was especially true last week in the energy (and gold) market as Crude Oil spiked higher and reversed sharply lower in one session, 2/24/22, when Russia “officially” invaded Ukraine. The pivot point price high created a notable resistance level for both the bulls and bears to shoot against. Figure 3.

Figure 3: Light Crude Oil ($95.72). | While I think Crude eventually resolves higher, it is more prudent to watch what happens versus trying to anticipate based on an opinion. In other words, follow the energy market’s lead. For now, resistance at $100.54 is a formidable top, at least short-term.

Speaking of cannons and trumpets and the equity market’s reaction, was last Thursday’s reversal by the S&P 500 (SPX) an undercut low retest (selling climax bottom) of its 1/24/22 price low (new 52-week lows on NYSE did not exceed 1/24/22 reading), or simply a rip-roaring countertrend move? Figure 4.

Figure 4: S&P 500 Large Cap Index. | A lot of overhanging sell pressure exists (red lines). First support exists in and around 4221—January 24 and February 23 low.

Also, did the bullish “Hammer” formation (SPX weekly chart) establish an important price low? Figure 5.

Figure 5: S&P 500 Large Cap Index (please reach out for details about candlestick charts & the formation). | Last week’s price low at 4114.65 is of critical importance (support) for SPX.

Bottom Line: The hammer formation established an important price low and the reversal from down to up was part of a bullish short-term undercut low retest sequence. However, with the NDR Catastrophic Stop Model still in defensive mode and a pending policy change by the Fed, bullish confirmation is necessary to confirm last week’s tape action. In other words, the equity market needs to prove itself and we need to see how it reacts to overhanging resistance levels—please refer to Figure 4.

What does this (bullish confirmation, equity market proving itself) look like? The following is an extension of last week’s list:

  • Additional upside follow-through – An upside gap up, a pattern of higher troughs & higher peaks.

  • Overhanging resistance is violated – Areas of selling pressure are worked through.

  • Momentum Surge – Rejuvenated demand—volume related.

  • Internal improvement – Base-building period during which most areas start moving in sync.

  • Breadth Thrusts – These tend to be stock related.

  • NDR Catastrophic Stop Loss Model reverses its recent sell signal and gives a buy signal.

DOUBLE BOTTOM: CLOSE BUT NOT YET COMPLETE

Figure 6: iShares Russell 2000 (IWM—small cap proxy/$203.32). | While A LOT more work is needed, both on a relative basis (top frame) and absolute basis (lower frame), a close above 210 would complete a bullish short-term Double Bottom pattern. Please don’t anticipate a breakout. Once again, let the market prove itself as support (green line and price labels—lower frame) and resistance (red line and price labels—lower frame) are clearly identified.

Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know how we can further support you.

Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management

—Written 02.28.2022. Chart source: Stockcharts.com unless otherwise noted.

PDF Copy of this Article: Day Hagan Tech Talk: Meat and Potatoes (pdf)

Originally published by Day Hagan on March 1, 2022.

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