Possible beginning of a new bearish leg for SPX

thessia_ Updated   
SP:SPX   S&P 500 Index

  • Main bearish trend (dotted teal downtrend line)
  • Reversal attempt in progress (purple uptrend line)
  • 200-SMA breakout in jan-2023
  • Failure to continue the breakout (failed bull flag - orange lines)
  • Arrow #3 as a good entry option for a bear trade.
  • Possible beginning of a new bearish leg, aligned with the main trend
  • Possibility to surpass the last low (oct-13-2022). Set target @3,330.00.
  • Timeframe expected: 3 to 4 months.

Detailed explanation:

2022 was a very bearish year for stock markets, and prices have navigated under the 200-days simple moving average (200-SMA) for the most part of the year. On the other hand, the first months of 2023 had some attempts of breakout to this widely known indicator.

By December, 2022, prices tried to break-up the 200-SMA, but failed, then pulled back and tried a new breakout in January, 2023, that succeeded and provided some hope for a reversal. Arrow #1 is signaling the top of this bullish leg. After this, prices developed a little bull flag (orange lines), near a resistance level.

I have been closely following the price movement on this flag, to try to catch a trading opportunity, bullish or bearish. The bullish case was the most evident, and would happen with the breakout of the flag, confirming the continuation of the main trend reversal. But if it didn’t come true, prices could continue on a longer range or even breakdown the 200-SMA, providing, hence, a bearish trade. It turned out that the second case is being developed.

On February 21st the bull flag was undone, by a very bearish -2% candle, then some days passed and the 200-SMA offered a support for the prices, this movement came along with some doubt candles (tiny ranges, long wicks), their in the area near arrow #2.

This arrow points specifically to a bullish engulfing candle, that signaled a possible return of the bull and that the 200-SMA would indeed sustain the prices. After that, a bullish candle confirmed the engulfing pattern, and I considered that now it was a “make or break” situation, that either had to continue with strong buyings or finally give away and return to the main bearish trend (dotted teal downtrend line).

The second scenario happened, with a classical shooting star candle denoting a top, indicated by arrow #3 and followed by a relevant -1.53% bearish candle. I consider it can turn out to be the beginning of a new bearish leg in favor of the main market trend. If it breakdown the 200-SMA (and the previous bottom, of arrow #2) we will probably be full gas back to the bearish trend, reverting that secondary bullish trend indicated by the purple line.

Predicting the future is impossible, but trading is a probability game, and to my criteria the odds are high enough to make a bet now. So, I started a trade yesterday near the market close. The stop zone is a little above the high of the shooting star candle of mar-06-2023, and my target is @3,300.00, I chose this number considering that this is a movement with the main trend, and that the last low (oct-13-2022) is usually surpassed in this kind of situation.

PS: I know there’s a whole FED policy/interest rates discussion going on, and that it provides much of the ultimate reasons for the market movements I described, but I will stick to technical analysis here and to the principle that the chart sums it all up, hence I considered only price patterns in my analysis.
The setup is developing greatly! Yesterday SPX just lost the 200-SMA with a remarkable bearish candle, and today (mar-10-2023) we're having another very bearish day. Just for historical record, this week we're having news of shutting down of Silvergate Bank and Silicon Valley Bank, it seems like shadow banking is starting publicly shows its cracks.

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