The Ebb and Flow of Market Forces
This past week in the stock market was a roller coaster of emotions and strategies, as the ongoing tussle between the bulls and bears unfolded. The week started with the bears in a strong position, making significant moves in the first half. However, they seemed to lose their stamina, allowing the bulls to surge ahead in the latter part of the week. A particularly intriguing observation was made in the S&P 500 (SPX) weekly chart, where the body of the Heikin Ashi chart remained under the critical 4800 level, despite the market closing above it at 4839. This situation poses a challenge for the bulls in the upcoming week; they need to intensify their efforts to maintain their lead and prevent the bears from regaining control
S&P 500 (SPX) Trends and Resistance
- Upward Trajectory: The SPX showcases an upward trend on various time scales - weekly, daily (over 3 months), and hourly (over 10 days).
- Critical Support and Resistance Levels: Currently, the SPX stands at 4839, having broken past the 4800 resistance. If this bullish momentum persists, the next significant resistance could be at the Fibonacci extension level of 5111.78. On the downside, the first line of defense is at 4800, followed by a series of supports at 4750, 4700, 4600, and 4550.
Volume Profile and Market Probabilities
- Volume Profile Analysis:
In examining the S&P 500's (SPX) daily volume profile, we observe a distinct trend in the Points of Control (POC). The nearest POC for the SPX is currently positioned at the 4750 level, followed by the next significant POC at 4500. This observation is crucial as the POC levels represent prices with the highest volume over a specified period, indicating substantial trader interest and activity.
Over the past year, the bulk of the trading volume for SPX has been concentrated in the range between 4483 and 3929. This concentration suggests these levels have acted as key areas of interest for traders. Moreover, the one-year POC, a critical level to note, stands at 4138. This level, in particular, reflects the average price over the past year where the most trading volume occurred.
Given these insights, there's a potential scenario where the SPX price could eventually retrace back to these areas, particularly the one-year POC at 4138. This retracement could occur as part of the natural ebb and flow of market prices adjusting to areas of high interest and volume. Simultaneously, as the market builds its profile at the upper end, it's important to monitor these POC levels closely, as they often act as significant support or resistance zones, guiding future price movements in the SPX.
- Market Probabilities: The February option expiry suggests a bullish potential up to 5042 and a bearish potential down to 4677.
- Weekly Market Makers Move: For SPX, the forecasted range includes an upside to 4898 and a downside to 4778.
Market Breadth and Indicators
- Up Days and Down Days: As of January 20th, the SPX is up by 70 points for the year, in contrast to a 133-point increase during the same period in 2023.
Fear and Greed Index Analysis
The current state of the market can be intriguingly summarized through the lens of the Fear and Greed Index, a popular tool used to gauge investor sentiment. Presently, this index stands at 72, a slight decrease from its position at 77 a month ago. This subtle shift points to a slight change in market sentiment, leaning away from extreme greed. For a detailed view of this index, you can visit the Fear and Greed Index.
Stock Market Participation and Strength
A deeper dive into the overall strength of the stock prices reveals that only a small fraction of stocks is actively participating in driving the market forward, with the overall stock price strength hovering around 2.8%. This indicates that the majority of stocks are not significantly contributing to the current market movements. An interesting contrast is observed in the performance of the S&P 500 (SPX) compared to the RSP (equal-weighted market index). While the SPX is showcasing an all-time high, the RSP is experiencing a downtrend in the short term. Additionally, its 3-month chart reveals that prices are hovering towards the lower end of the standard deviation range, suggesting a broader market participation lag.
Volume and Volatility Indicators
The Mclean Volume Summation Index, which helps gauge the market's breadth and strength, is currently showing a deceleration from its higher levels. This could indicate a waning in the overall market momentum or a consolidation phase. The Put/Call (P/C) ratio, another critical market indicator, stands at 1.13. This number points to a moderately bearish sentiment among options traders. Lastly, the Volatility Index (VIX), often referred to as the market's fear gauge, is in the 13 range. Despite the market's high levels, the VIX shows reluctance to move lower, signaling a potential undercurrent of investor caution or uncertainty about future market movements.
Market Breadth Analysis
The current market breadth presents a nuanced picture. While key indexes like the SPX show robust performance, the broader market participation remains limited, and volatility indicators suggest a degree of caution among investors. This analysis underscores the importance of considering a range of indicators to gain a comprehensive view of the market's health and investor sentiment.
Market Correlation and Divergences
- Correlation Dynamics: While most major indexes showed high correlation, the RUT was less correlated with SPX and NDX. An anomaly was observed with a 94% correlation between bonds and markets, which is expected to revert to an inverse relationship. Oil and USD showed a strong inverse correlation with the market.
- Copper’s Lead: The correlation between copper and the market is gradually diverging, a potential precursor to future market movements.
Key News Impacting Last Week's Market
- Consumer Sentiment: A notable rise in consumer sentiment, the highest since July 2021.
- Inflation Expectations: Future inflation expectations dipped to their lowest since December 2020.
- Global Market Dynamics: China’s new role as Russia’s top crude oil supplier marked a significant global market event.
- U.S. Stock Performance: Positive trends in major U.S. stock markets, with the S&P 500 entering a bull market.
- Banking Sector Warnings: Concerns about the potential impact of costly deposits on interest income in 2024.
- Manufacturing Sector Updates: New lapses in manufacturing were observed in some U.S. companies.
Next Week’s Reports
Conclusion with a Cautionary Note
The market's recent performance, marked by a struggle between bullish and bearish forces, suggests a period of heightened caution for investors. The disparity between the market's outward appearance and the underlying technical indicators warrants a careful approach. Investors should stay vigilant, monitor upcoming reports, and consider the broader economic context, including the latest developments in consumer sentiment, inflation expectations, and global market dynamics. A balanced and informed perspective will be key in navigating the uncertainties of the financial markets in the weeks ahead.