Day Hagan Tech Talk: Cardiac Arrest
A downloadable PDF copy of the Article: Day Hagan Tech Talk: Cardiac Arrest (pdf)
Summary
Following the domestic equity market’s heart attack-inducing decline, it needs a slow, methodical rehab to repair the chart damage (Figure 1). Friday started the process, but more is needed.
Heart Attack Victims
At the end of 2024 through early January, we repeatedly stressed that Wall Street participants should expect volatility in both directions. Using the S&P 500 (SPX) as an example, following a third unconfirmed (breadth and momentum divergence) new high in February, a 10% decline followed—heart attack-inducing volatility, in my opinion. At this point, I would be surprised if it didn’t continue. Let’s see what the FOMC’s Wednesday decision and statement bring.
The Double Top Reversal (DTR) is a bearish reversal pattern. The pattern has two consecutive, roughly equal price peaks, with a moderate trough (price low) in between. Although there are variations, the classic DTR marks a bullish-to-bearish price trend change. At times, it’s short-term. Other times, it’s intermediate term. One determining factor is how the market internals stood prior to the change in the trend.
Support turned Resistance. Broken support becomes potential selling pressure (resistance). Sometimes this newfound resistance level is tested by a reaction rally.
Price Target. Subtract the distance from support break to peak to obtain a price target.
Price or time filter. To differentiate between valid and false support breaks. A price filter could require a 3% support break before validation. A time filter might require the support break to hold for three days before it is considered valid.
Figure 1: Dow Jones Industrial Average and NASDAQ. | If last Friday’s 10:1 up day is valid (definition below), how resistance is handled, as well as a retest of support, will be very telling.
You might ask, “Art, why are you highlighting the chart patterns after the fact?” My answer is threefold:
To help navigate future periods of high volatility within the equity market or any market, asset class, etc.
To aid in discerning potential price targets and areas of overhanging selling pressure.
It is a reason to connect with clients.
Note: Last week’s report included the support and resistance levels for SPX along with a price target of 5510. The price target was derived, as stated in bullet point 2 on the first page, from a chart breakdown. Prior to Friday’s strong rally, SPX’s low last week was 5521 (closing basis) and 5504 (intraday). Dare I say, “Close enough for government work?” Please reach out for an updated chart.
Steps for a Bottom: What Needs to Occur
Amid the conditions discussed above and since the first negative Advance-Decline Line divergence late last year, it is important to at least discuss the necessary groundwork from which some type of bottom develops.
On a short-term basis in a decisive downtrend, the equity market typically follows a four-step bottoming process:
Oversold (low, not a bottom)
Rally
Retest
Breadth thrusts
As discussed last week, the High Beta complex has been purged. Based on several short-term measuring tools, domestic equity market indices had/have entered oversold status—step 1.
The market will inevitably rally (please refer to resistance levels in Figure 1). For the bottoming process to move through step 2, rallies need to last longer than two days to indicate they are driven by more than short covering. Rallies need to be broad-based and ideally not just driven by stocks that declined the most. Last Friday’s 10-to-1 up day (NYSE Advancing Volume beat NYSE Declining Volume by a 10-to-1 ratio) was bullish (potential Momentum Thrust), helped establish/confirm an initial support low, and was a great start. But follow-through and stability are vital.
Most of the time, after a rally, there is a retest (step 3). On a successful retest, market indices may or may not breach their initial low. More importantly, successful retests show signs of less selling pressure (like what we pointed out in last week’s report). This can include, but is not limited to, fewer stocks making new lows, a higher percentage of stocks above certain moving averages, less total volume, and less downside volume versus upside volume.
Unsuccessful retests are defined by material breaches of previous lows by the popular averages, expanding new lows, and more declining volume than advancing volume. If the retest fails, the bottoming process reverts to step 1.
In the final stage (step 4), an extremely high percentage of stocks rally together in a breadth thrust. For example, two 10:1 up days without an intervening 10:1 down day would be a breadth thrust.
The process leaves room for judgment. After the 2020 lows, the market skipped the retest and went straight to breadth thrusts.
Bottom Line: The market has attempted to move from stage 1 (oversold) to stage 2 (rally). Look for a broad rally lasting for more than two days, less selling pressure on declines (step 3), and, ideally, breadth thrusts (step 4).
The Day Hagan Smart Sector Strategies incorporate built-in risk management parameters relating to sector allocation and equity versus cash allocation. Please let me know if you would like to schedule a call to discuss the process and discipline underpinning our Smart Sector with Catastrophic Stop, Smart Sector International, and Smart Sector Fixed Income strategies. Disclosures and Fact Sheets can be found here: https://dhfunds.com/literature.
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Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 3.15-16.25. Chart source: Stockcharts.com unless otherwise noted.
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