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Chart Advisor: Detecting SPX Declines

Chart Advisor: Detecting SPX Declines

Posted October 18, 2023

By Manuel Tellechea, CMT

1/ Looking Underneath the Surface

2/ Volatility Increase

3/ Micro Caps Breaks Down

4/ Not Everything is Bad

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1/Looking Underneath the Surface

The 200-day moving average bounce at the beginning of October could not close the bearish gap that occurred on September 20th. Price has now turned south again, crossing below the 4350 level, which was a former resistance.

One signal that helps explain why this bounce was not very strong is by observing market internals.

The percentage of index participants remaining above the 200-day, 50-day, and 20-day moving averages is currently below 50% and trending downward.

Bulls want to see broadening participation to reassert control. Until then, the bias is sideways, at best.

2/ Volatility Increase

The VIX Index has been increasing since the middle of September, breaking out a downward-sloping trendline to close at almost 20 points.

This indicates a certain amount of volatility but nothing extreme yet. The market needs the volatility to remain under this level to reduce the likelihood of increased selling pressure.

This chart shows the inverse relationship between the VIX and the S&P 500 – when the VIX goes up, the price of the S&P 500 usually goes down. Remember that the VIX is often referred to as the market’s “fear index or fear gauge”.

3/ Micro Caps Breaks Down

Another indication of weakness in the internal market can be observed in the small-cap index, represented by the IWC ETF. It has had a challenging year, consistently lagging behind in every minor market rally. In fact, IWC has reached its lowest level in roughly three years.

As you can see, price has finally broken below a support area that had been tested multiple times.

Notably, below this level, there appears to be no significant support until the price range between 88 and 81 points, which coincides with the area of highest trading volume. If this scenario unfolds with a downward resolution, there is a higher likelihood that the broader market will face increased selling pressure.

4/ Not Everything is Bad

Despite the prevailing pessimism in the market and the presence of some signals that lack full robustness, it’s not all doom and gloom. One positive aspect is that the Discretionary Sector is consistently recording higher lows when compared to the Consumer Staples sector.

This has proven to be one of the most reliable indicators for assessing the health of a bull market.

When consumer discretionary stocks (representing things we want) outperform consumer staples (representing things we need), it signifies that the market is not adopting a defensive stance.

We have used the Equally Weighted Index chart to gain a more comprehensive perspective.

This tells us that despite the recent pullback in the SPX, the ratio continues to reach new highs.

This situation contrasts with the prelude to the 2020 downturn when the index was not keeping pace with the market’s ascent and was already signaling a more defensive posture.

Originally posted 16th October 2023

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