Broadening wedge pattern: Will the market break out?
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Expanding Wedge Pattern, Breakout or Breakdown?
In a previous post I explained how traders should watch out for selling or long positions being covered near crucial long-term resistance zones. You can see these resistance levels above highlighted by the 200-day moving average and the downward trending bear market resistance level. The bear market resistance is the same dynamic resistance level of the expanding triangle or wedge pattern. Will the market breakout to the upside into a bull market? Or will there be another reversal to the downside at this resistance level just like what has already happened a few times in this bear market that we are currently in?
DON'T FIGHT THE TREND
Currently the long-term trend is down. If you are a swing trader then you don't want to fight the trend. So, in theory, when the price of the $SPDR S&P 500 ETF(SPY.US)$ reach a major long-term resistance level investors should be looking for short positions in a bear market. That appears to be the case this week as you can see in the picture below. There were a lot of sellers stepping in this week near the bear market resistance level. Also take note of all of the selling in the past that occurred at this same resistance level. Don't fight the trend until it ends. What will it take for this downtrend to undergo a reversal?
THE TRENDS CAN CHANGE
You don't want to fight the trend but the trend must eventually change. Will this year be a continuation of last years downtrend? Some of the factors that were holding down equities last year are no longer a hindrance. Last year the Federal Reserve needed to see inflation dropping in order for the interest rate hikes to end. Their interest rate hikes sent the dollar skyrocketing with yields as inflation was climbing in a big way.
Compared to the majority of 2022, this year has a much better macro picture to give equities some room to the upside. Inflation is obviously on a downward path. The China reopening could slow this downward trajectory but the direction is still downward which gives the Fed room to slow the interest rate hikes. This would be good for equities.
As for the technical picture, This is the first legitimate higher low in price action that has happened during this entire bear market. If you know anything about an uptrend then you know that an uptrend starts when a higher low is printed on the charts.
The dollar is dropping with treasury yields. This is due to all of the bad economic data in the US that shows slowing growth which is bringing down inflation. This is good for equities in the current macroeconomic environment. All of the bad economic data has been good news for equities. That was the market narrative for the entirety of last year.
It appears that the trends could possibly be changing for 2023. Bad news has been good news for equities in 2022. So far this appeared to be the case for 2023 until the last batch of economic data was released. You can see this in the picture below. In this instance the bad news in the economic data did not give a boost to equities. This shows you that recession fears are still fresh in the back of most investors minds.
BAD NEWS IS GOOD NEWS UNTIL IT IS TOO BAD
"Inflation is obviously coming down at this point. So this year is the year of disinflation. Disinflation is very bad for an economy. It is the last thing you want to see. But we need inflation to come down. It is indeed coming down and it is affecting the economic data like we saw today. There was very bad economic data on all data points. The market initially reacted positively to the slowdown in economic activity. But the narrative in the media is that the bad news was too bad today. And that is the reason for this sell-off in equities."
This was a quote from a previous post. Last year the Fed wanted to see slowing economic growth to slow down inflation. They are getting what they wished for. But when the economic data is too far on the negative side the recession fears will take over and you will see investors selling. That is similar to what we saw with the last batch of economic data that was released. You can see that data in the picture below.
WILL THERE BE A BREAKOUT OR A BREAKDOWN?
Personally I am sticking to the long-term downtrend at the moment. That is where my money is currently. This year the market is set up in a much better position than it was January of last year so things look a bit more promising for 2023. If the S&P 500 can climb above the bear market resistance level mentioned above then I will be much more optimistic about potential upside in the market. Until that happens I will not be placing any long-term investments in the market. Im still bearish but I am leaning more towards the bullish side than any other instance from 2022.
DO YOU THINK THAT THE S&P 500 WILL CLIMB ABOVE THE LONG-TERM RESISTANCE LEVEL VERY SOON?
As always, good luck trading. Be careful and be patient. Give your investments time. Don't invest in anything you don't understand. Don't put all of your eggs in one basket. Don't listen to the hype. Don't fomo or panic into or out of trades. And just follow the trends. A trend is your friend.
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