Morning meltdown 100 calendar12/23/2023 The index rebounded when the 14-month RSI was near 30. Using two previous instances, dot-com and GFC episodes, as they were similar to the 2022 decline in terms of their duration, the probability is high that US indices are in the advanced stages of the decline (see chart). To get a sense of how advanced the current downtrend is, the Relative Strength Index (RSI) can serve as a guide. In a way, the long-term average’s flatness can be interpreted as trend ‘exhaustion’. However, uptrend reversals are often preceded by a break below the moving average associated with a flattening of the 200-WMA (chart’s red annotations). The index tends to rebound from near the moving average and when it is ascending (chart’s blue annotations). That’s because, in the past, the slope of the 200-WMA and the average itself has provided a guide in cases of prolonged downtrends. Given the sharply ascending slope of the 200-WMA, the probability of the index holding the 3,394- 3,585 area and rebounding from around there is high. There is potent support at the pre-Covid high of 3,394. S&P 500 indexįor the S&P 500, in terms of potential downside, the 200-week moving average (WMA now at about 3,585) is likely to offer a quite strong initial cushion. In a way, the MACD indicator can serve as a guide to how stretched the trend was at the start of the year, although quantifying the extent of optimism/ pessimism can be tricky given it is an unbounded indicator (see chart above). This doesn’t imply that the index must revert towards the 200-MMA – it could well go sideways, while the 200-MMA catches up. Going by the distance between the 200-MMA and the index, the dot-com crash, Great Financial Crisis (GFC) and Covid-19 selloffs were all preceded by extreme overbought conditions. Prices tend to mean revert to them from extreme overbought or oversold conditions, especially when some of the drivers of overextension change/reverse. Long-term moving averages tend to act as proxies for broader trends. At the start of the year, the gap between prices and the 200-month moving average was the widest on record (MMA see chart). This year’s decline is a ‘normalization’ process from extreme overbought conditions. Using the three benchmark indices, the Dow Jones Industrial Average (DJIA), the S&P 500 index and the Nasdaq Composite index, this section attempts to address the following questions: How advanced are we in the current downtrend? How much more downside could there be? Importantly, what could be the trend over the next few months?īut first, let us set some context for the 2022 decline. US equities are approaching year-to-date lows and there are no signs of a reversal.
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