Trend Check with Tushar Chande

SPX Sets Up Shallow Down-trend Channel: Heading Towards Retest of Recent Lows?


The S&P 500 Index has set up a shallow down-trend channel, possibly setting up a retest of the recent lows.  Three days in a row, the market has closed below the open, and the past four days show relatively long upper shadows on candlestick charts denoting overhead resistance.  Besides, the $VIX index remains above 17, and the market thus remains unsettled, primarily due to the bond market, which is testing critical support.


Chart 1: The $SPX has set up a shallow down-trend channel over the past few sessions. Note how the Chande Trend Meter has fallen below 20, indicating a down-trend. (A live chart is here.)


Double Bottom Beckons

As I noted in my previous post, a double-bottom pattern leading to a "W" shaped price pattern to recovery highs is quite likely.  This possibility has also gained some fans over at CNBC.  Over the past few days, the daily chart has followed this tendency, but we are still a long way above the recent lows, and if the market wants to go lower, it will take another week or two.


Chart 2: The market has drifted lower along the dashed line from my previous post.  However, we are a long ways away from testing the previous lows. (A live chart is here.)


$VIX Remain Elevated

The $VIX index remains above the recent resistance it had to overcome as it raced to 50.  This means the market has the energy to push lower in another sell-off to test the early February lows.  The market remains a bit nervous because the US 10-year Treasury yield has been flirting with 3 percent.  The huge Vanguard Total Bond Market ETF is testing key support, and perhaps the March unemployment report and the late-March Federal Reserve meeting will be needed to help the bond market decide.


Chart 3: The $VIX index remains elevated, above the key 17.5 resistance level which is now acting as support. This means the market has the nervous energy to push towards an energetic retest of the February lows. (A live chart is here.)


Chart 4: The important US 10-year Treasury bond yield has been flirting with the 2.92 level on the way to 3 percent.  Note how the Chande Trend Meter is confirming the rising rates by showing a strong up-trend in the yield.  Large institutional option strategies around this level could roil the markets. (A live chart is here.)


Chart 5: The massive BND ETF has reached key support, but the Chande Trend Meter shows it is trending lower strongly.  A break below this key support level will probably energize the $VIX index. (A live chart is here.)


Short-term and Medium-term Trends Are Mixed

The moving averages have had time to their work, and now the trend check carpet shows that the short-term and medium-term trends in the major indexes are flat or down (they had been all up during the move from September to January). Observe that the intermediate-term and long-term trends are still up.  The time period doubles at each step from top to bottom and market breadth covered by the indexes increases from left to right.   A look at the various capitalization oriented Vanguard ETFs shows that the intermediate-term trend has turned flat on the small-cap and mid-cap Value ETFs and small-cap and mid-cap blended ETFs. So the underlying technical condition has worsened a bit over the past few weeks.


Chart 6: The major market index trends are flat to down in the short-term and medium-term.  The intermediate-term and long-term trend is still up.

Sector Trend Strength

As you would expect during the sell-off, no sectors are trending up strongly, and most of the equity sectors or indexes are in a neutral trend mode.  Even the utilities are not trending lower as strongly as a few days ago.  Relatively speaking, technology, consumer discretionary, industrials and financials are doing better than the SPY ETF.

Chart 7: Earlier in the year, a majority of the equity indexes and sectors were trending with trend strength above  80 or 90.  Now most of them are neutral.  XLK, XLY, XLI and XLF are currently the strongest sectors.


Looking Ahead

The market has to make up its mind about retesting the early February lows, and the elevated $VIX as well as rising rates suggest the market could get there.  But, a few days last week, the market ignored rising rates.  So this pattern is still developing, and a false breakout to the upside cannot be ruled out.

Long-term investors should note that the intermediate-term and long-term trend in the market still points higher, and perhaps view any weakness as a "low-risk" entry point into a longer-term up-trend.  As usual, only time will tell.

I hope you have enjoyed this multi-market analysis and will subscribe to the blog using the easy link 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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