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Stocks Brace For Impact

Published 08/09/2022, 03:50 AM
Updated 09/20/2023, 06:34 AM

The S&P 500 had risen by nearly 1% at the start of the day yesterday, but by day’s end, all the gains were gone, with the index finishing 12 bps. There are now two bearish trading patterns in the index that I am noticing, given yesterday’s weak close. The first is the rising wedge pattern, which I have repeatedly pointed out. The second is the 2b topping pattern that appears to be present in the S&P, Dow, and QQQ ETF.

The rising wedge in the S&P 500 is easy to see, and it tested support again yesterday. The index attempted to take out the highs from August 3, was promptly rejected, and then closed below the August 3 price of 4155.17. That sets up what I think is that 2b Topping Pattern.

S&P 500 Daily Chart

QQQ

The same pattern is present in the QQQ ETF, when the ETF tried to take out the highs from August 4 and was promptly rejected.

QQQ Daily Chart

Dow

The same pattern is present in the Dow Jones Industrials as well.

DJIA Daily Chart

These 2b patterns can be invalidated if the market can clear these prior highs. If not, then the 2b pattern sends that potential reversal signal. This diamond pattern in the S&P 500 futures and the rising wedge also speaks to a possible reversal in the market to come.

S&P 500 Futures 1-Hr Chart

VIX/VVIX

Additionally, we saw the VIX to VVIX ratio drop again yesterday, most notably because the VVIX index rose by around 3.3% yesterday, while the VIX rose by 60 bps. The declining ratio and the rising VVIX index tell me that very quietly implied volatility is starting to rise again in this market.

VIX / VVIX Ratio Daily Chart

NVIDIA

NVIDIA (NASDAQ:NVDA) pre-announced its quarter, posting disappointing results and a significant revenue miss. The news was surprising, especially since it was NVIDIA, a company that doesn’t miss very often. Yesterday’s news killed whatever upward momentum NVIDIA had, dropping it below a short-term uptrend. I’m surprised it was down by just 6%.

Nvidia Daily Chart

Microsoft

Microsoft (NASDAQ:MSFT) also looks like it may have that rising wedge pattern in it. Additionally, a bearish divergence is taking place with its hourly RSI. That big gap needs to get filled at some point, too, all the way down around $252.

Microsoft 1-Hr Chart

Netflix

Netflix (NASDAQ:NFLX) rose yesterday, something I didn’t think was likely, but it also looks more evident that that stock has a rising flag pattern. Flag patterns that rise are reversal patterns and tend to result in a drop back to the origin, in this case, around $175.

Netflix Daily Chart

Original Post

Latest comments

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oh boy bunch of you guys betting on drop after cpi, guess its time to go long.
Thank you for the article 💯
US CPI indicators pointing up??? First, US Unit Labor Costs came in hot at 10.8%. Not good for core CPI which is the number the Fed is focused upon. Second, Mexico just reported that instead of falling - inflation rose. "Inflation rose to 8.15% in the year through July from 7.99% in June." Also not a good indicator for US CPI tomorrow. Tonight @9:30 Canada reports CPI. If they are also up, how could US be down if our two major trading partners are up?
I see an intact bull channel. Maybe it will expand via some sideways chop but this is a very strong structure and until it breaks all I see is upside. At worst I see a retest of 4000 to bait in the bears and squeeze them on a drop and pop rally.
🤗perfect!(once again)
Excellent charting! It’s been at the top of this downward trend for days. Also negative divergences have picked up on the hourly.
Good research Michael. Good to be well informed in this market.
guess bears never learn
bears have done great
Did you really understand the article
Good article. I enjoy your analyses.
its unclear what is driving stocks given the environmment.  does everyone yell Yipee! if CPI comes in at 7.9% rather than 9.1%?    The only number which will avert at 75bps hike in September is 2% and that is not going to happen.   Companies have forecasted week Q3 and/or Q4 ( look at Micron, Walmart, etc) so not sure why 30-40x eps multipliers are the right value going into this slowdown.
US Unit Labor costs came in @10.8% much higher than the 9.5% predicted. Mexico CPI also rose instead of falling. Tonight @9:30 Canada will also report. If they too are up, we should also be tomorrow. Perhaps overall CPI will fall because of the drop in oil, but core CPI, which is what the Fed says it is concerned about, looks as if it will rise.
 agreed, I saw that the average wages were going up so dont see how we do not get a 75bps hike in September.
 IMHO a 75bps hike in September is almost 100% certain (think the markets have it at 75% now). That is even if tomorrow's numbers show inflation peaked last month - which think most are expecting with the already known of falls in energy prices over the last quarter. The main challenge for the Fed is that also almost certain energy prices will start rising again circa Oct / Nov once winter demand kicks in / Russia uses energy to pressure the west + combined with entrenching wage demands + a very tight labor market etc. Right now the markets expect the Fed will rise by 75bps in Sept and then maybe take a breather in Nov to gauge the economy before potentially making additional hikes in 2023. But I can see another 25bps - 50bps hike in Nov should energy prices start rising again in Oct as expected and if inflation start to look like it is entrenching itself further
Good finally dropped at the top and stay flat you are right and good short again
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