Trend Check with Tushar Chande

$SPX Forms Key Bottom Near 2600 (As Expected)


In my post on Jan 27 I wrote about the $SPX that a "a drop to 2600 is not impossible" and showed a 50% retracement level at 2598.50.  Today, the market bottomed at 2593.07... within a whisker of my forecast.  The blow up in the $VIX index suggests a tradable bottom has formed, though we will need several days of backing and filling, and even a retest of the low.  Wall Street conventional wisdom gurus have also called this a bottom, so we can expect a bottom building process to commence at these levels.


Chart 1: The $SPX found support near the 50% retracement I described in my earlier post (see Chart 3 of that post).


$VIX Blows Past 17.5 to 50

I warned on Friday that the $VIX had not reached the levels of prior panic selloffs, and that "further downside action remains".  Overnight, the futures plunged several more percent, and all told, the drop in the S&P 500 futures from peak to trough was about -12%, and on the cash was approaching -10%.    The $VIX index exploded through resistance near 17.5 as expected, and blew up to over 50.  This exceeds the levels nicely identified by Tom Bowley, and we can say that this waterfall decline has met the requirements of a volatility spike essential for a tradable bottom.  So, net net, a strong waterfall correction that found support today near expected levels.


Chart 2: The $VIX exploded up to the painful levels needed for a tradable bottom.


Intermediate-term and Long-term Trend Is Still Up

My trend check carpet shows that the sharp selloff has not altered the intermediate-term and long-term trend picture.  The waterfall decline has turned the short-term trend picture negative to flat, and the path of least resistance over the short-term is also pointed lower.  All sectors have lost momentum and we have to wait for the bounce to see which will recover the best.

Chart 3: The short-term picture is mixed, but the intermediate- and long-term trend is solidly up.  The time frame doubles at each step from top to bottom, starting at 25 days.  The number of stocks in the indexes increases from left to right. (My trend-following models are here.)

Chart 4: The path of least resistance for the Russell 1000 Universe is down in the short-term, but up on all the other time frames.  Here I applied the trend following models to stocks in the Russell 1000 universe and roll-up the results.  Thus, this is a summary of the net state-of-play looking at the trend status of all the stocks underlying the index.


Chart 5: The candle glance images of the key S&P 500 sectors and major indexes shows equities in neutral zone and bonds trending lower.  The Cyclical stocks (XLY) held up the best.

Gold Loses Its Relevance During this Decline

Gold, expected to provide a risk-off protection, was utterly irrelevant in this decline, and has a positive correlation to stocks, not at all what one wants.  I am tired of hearing of gold as a risk-off asset class.


Chart 6: Gold has a positive correlation to the $SPX during this decline, not the negative correlation needed to provide protection in down markets.


30-Year Bond Yields Break Key Trend Line

The 30-year US Government Yields broke a long-term trend line, and bear watching as we go through the year.  Strong overhead resistance is expected to result in a "wall of buying".  We shall see.

Chart 7: Long-term US Government bond yields seem to have broken a key down-trend line that bears watching.

Tech Stocks Find Support at Trend Line

The tech-laden QQQ index found support at a key trend-line, which is encouraging, and one can keep track of it to see if this low holds.


Chart 8: QQQ found support near its trend-line as it should have, and thus, this is an encouraging sign for a rebound from these levels.


My 2018 Forecast Checks Out (So Far)

My 2018 forecast blog said "Flat and Volatile".  I think we can agree that so far, it has been correct.

Looking ahead, the market will try to stabilize around these levels, and a retest of the recent lows should be part of that process.

As always, head-line risk remains.

Thank you for looking in, and I hope you will subscribe to the blog using the quick links below.


Tushar Chande
About the author: , PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI. He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets. Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions. Learn More
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