Are We There Yet?

Just over 5 months ago, the overall US stock markets began a decline which has continued up to this writing. Of course it would have been difficult to predict the ensuing course of prices other than to use the simple gauges of support and resistance levels.  What was observable were momentum indicators hinting at a stalling of upward momentum.  The attached chart of the QQQ trust illustrates the divergence between the price action which was flattish at the beginning of the year versus the momentum statistic which showed declining peaks.  These kinds of momentum measures are very good tools to assess the strength of longer term trends.

Five months further into the year, the same questions continue as when the markets first began to decline in January; how low is low? Remember, there is no such thing as ‘too low’ with the exception of zero.  Just ask holders of PTON.  However, in the projection of market activity, a number of price target areas can be targeted using classic tools. One of those tools is classic Fibonacci retracements. Using the QQQ as a market proxy, prices have broached the 38 and 50 percent areas of the advance from the April climax low in 2020 to the high made at the beginning of 2022.  The expectation is that the next serious level of support to be tested is at the .618 retracement which targets the 258 area approximately. 

Should this level be approached, tactics would include observing momentum gauges to determine if there is a decline in velocity which would then lead to a turn in prices.  Another would be to look for chart prints that are indicative of a turn.  Specifically, we are looking for a candle pattern called a doji, whereby prices open, turn lower and subsequently finish unchanged or slightly higher on the day. This chart pattern hints that sellers are exhausted and at the very least, the low price print will be a stop point if longs are entered into.   The risk/reward probability is well defined here.

Displayed below is an example of a chart of NIO which has been in a protracted downtrend.  We can see that the momentum statistic is diverging from prices, giving hints that a bottom has been made for this stock.

We also note a similar setup in another well known stock, Zoom Communications, ZM.

We look for similar instances as we anticipate bottoming action in the overall stock markets.

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