A Countertrend
Rally?

by | Mar 16, 2022

Key Points

  • S&P 500 Fights at the 4,200 Level
  • Small Caps Remain Resilient
  • NASDAQ 100 Flashes a Bullish Divergence
  • Commodities Pause, the Trend Is Still Bullish
  • Sentiment is More Fearful Than Greedy

Mid-Week Market Update – United States

The S&P 500 is doing all that it can to hold the support zone between 4,200 and 4,300 that we have been highlighting. The index remains below the declining 50 and 100-day moving averages, keeping the bears in control of the trend for now. Moving above 4,400 would be an indication that the bulls are fighting to change the tide. The 14-day RSI has been making higher lows of late but continues to trade in a bearish regime.

The S&P 600 is also below the declining 50 and 100-day moving averages while remaining above support at the 1,250 level. The 14-day RSI has moved into a neutral position after making a series of higher lows. We continue to be impressed by the resilience of Small Caps, but it would take a move above 1,330 to begin to think that the bulls are taking control of the trend.

Relative to the S&P 500, Small Caps have stalled after a strong run from the February lows. The benefit of the doubt remains to the upside as the ratio holds the 50-day moving average. A break of the October/November highs could confirm a shift to a leadership position.

The NASDAQ 100 Index has found a cluster of support near the 13,000 level but remains below the declining 50 and 100-day moving averages. The 14-Day RSI is making a series of higher lows while continuing to trade in a bearish regime. Retaking the 14,000 level would be a sign that the trend is turning in favor of the bulls.

The relative trend remains bearish, below the declining 50-day moving average. The ratio made another lower low this week.

The 10-Year Note’s recent rally has proven to be countertrend in nature. The Note has given up the $128 support level to move further below the declining 50 and 100-day moving averages. While we had been open to the idea that a move above $130 would mark a change to the bearish trend, it appears that more time is needed for the bulls to take the ball.

The 14-day RSI is making a higher low as price makes a lower low, leaving a bearish divergence on the chart. The indicator remains in a bearish regime for now, however.

Last week we noted that we would not be surprised to see a pause in the rally for the Bloomberg Commodity Index as price became extremely overbought. That pause is in the process of playing out above the rising 50 and 100-day moving averages. This pause has given the 14-day RSI a chance to work off its overbought readings while keeping the trend in favor of the bulls.

Relative to the S&P 500, commodities remain leadership with the ratio above the rising 50-day moving average.

Sentiment Check

The CBOE S&P 500 Volatility Index (VIX) has crossed below the 30 level and the 10-day moving average, alleviating some of the fear that had built up in the market. However, the VIX is still elevated, opening the door to a possible counter-trend equity rally in the short term.

The VIX Curve has normalized over the past week (is no longer inverted), and the S&P 500 has thus far held the 4,200 level. Last week we highlighted the potential for overly bearish sentiment to lead to a countertrend rally. However, we want to see the index levels that we highlight above taken out to the upside to be confident that these rallies have staying power.

The CNN Fear & Greed Index currently stands at 19, up from 13 last week, and in a position of extreme fear.

Take-Aways:

Equity indexes in the U.S. are in a position to embark on countertrend rallies, something that we began to explore last week, as sentiment remains more fearful than greedy. We have highlighted key upside levels that must be broken to have confidence that these rallies could have staying power. Until those levels are recaptured, the bears remain in control of the trends. Away from equities, treasuries remain under pressure and have weakened further. Commodities are in the midst of the pause that we highlighted as likely in this note a week ago.

Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.