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Don't Confuse a Cyclical Bear Market Bounce With a Secular Bull Market Rally

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There are never any guarantees in the stock market. As much knowledge as I've gained over the years, and as much respect I have for my fellow technicians here at StockCharts.com, there's simply no way to ever be sure that your forecast is the right one. I've been humbled plenty of times, and perhaps 2022 will be one more to add to the list.

But I REALLY don't like this market.

I don't trust a single rally. After the S&P 500 rallied from 4222 on Monday, January 24th to its high of 4595 on Wednesday, February 2nd -- an incredible 8.83% gain in just 9 calendar days -- Meta Platforms (FB) dropped its earnings bomb on U.S. equities. From Wednesday's high of 4595 to this morning's low at 4452, that represented a 3.11% drop in a little more than 24 hours. The NASDAQ's drop was even greater at 4.51%. This whipsaw action is absolutely insane right now. If you've had great experiences on the roulette wheel at a casino, then you might also be great at forecasting stock market performance on a day-to-day basis. It's crazy and wild right now, which is usually the case when major issues divide the bullish and bearish camps.

Bear market rallies typically fizzle at one of the key Fibonacci retracement levels, while secular bull market rallies result in higher highs, easily breaking out above prior market highs. After our horrific January, the bulls have a ton of work left to do. The very first step is to clear the key 61.8% Fib retracement level. Here's where the S&P 500 and NASDAQ stand right now:

S&P 500:

NASDAQ:

Based on the above, the S&P 500 has room to the upside to roughly 4600, or just another 1.5% or so. The NASDAQ, which has been hit harder, has maybe another 5% or so before having to tackle that critical Fib resistance.

If you're unable to determine that the NASDAQ has been underperforming based on the above charts, this next $COMPQ:$SPX relative chart makes it much easier to see:

The NASDAQ has much more of a growth flavor to it, which is why it's been performing so poorly on a relative basis. Growth stocks have been under tremendous selling pressure -- both absolute and relative -- since their November high.

In addition to the technical and sentiment warning signs that I've been discussing, history is now telling us to GET OUT of the market. Since 1950, the "January Effect" has been unbelievably accurate in predicting "balance of the year" performance. That Wall Street adage, "as goes January, so goes the year", has a ton of merit to it. I'll be discussing that historical phenomenon tomorrow morning during a special FREE presentation of "The January Effect", which will start at 10:00am ET.

For more information and to register for the event, you can either (a) CLICK HERE to sign up for our EB Digest newsletter (100% free, no credit card required) or (b) use the room link below to join me directly. If you decide to join using the link, we'll add you automatically to our newsletter. It's important to join our EB Digest community as that will ensure that you receive room instructions in the future for all of our free events. For the link for tomorrow's event, click here.

(The room should open around 9:30am ET.)


Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
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