A Technical Look at the Broad Market

After last week’s to-and-fro, let’s take stock of the stock market. [The Rude Awakening] October 10, 2022 [WEBSITE]( | [UNSUBSCRIBE]( A Technical Look at the Broad Market - The SPX got hammered on Friday, falling 2.8%. - The charts remain ugly, with the SPX trading under the 50- and 200-day MAs. - The only thing holding up the market is the employment numbers. Biden to Introduce Social Credit System like China? [James Altucher]( If you say the wrong thing on Chinese social media, you are labeled “untrustworthy”. They can then take away your ability to travel, restrict internet access, or deny your family the best jobs. They even confiscate your pets. Thanks to Biden’s new Executive Order 14067, a former CIA and Pentagon advisor predicts America will soon become a total surveillance state like China. [Click here to see our dark future…]( [Click Here To Learn More]( [Sean Ring] SEAN RING Dear Reader, Happy Monday to you from rainy Northern Italy. I enjoyed a subdued weekend—no travels or experiences to report. Micah had a persistent cough, so we stayed in to give him some rest. That allowed me to read a bit and look at the charts. I was especially curious about the charts because we had one of those up-and-down weeks. Headlines on Friday evening read something like, “Dow hammered today, but scores a weekly gain.” That’s true: the markets were smashed on Friday but indeed finished slightly up on the week. So, where does that leave us? To help in answering that question, I finally - finally! - started to read The Tao of Trading: How to Build Abundant Wealth in Any Market Condition by Simon Ree. I’ve mentioned Simon in this column and have followed him for a long time. I haven’t finished the book yet. But what I’ll do in this edition of the Rude is use some of the tools Simon writes about to analyze the current market’s condition. Where We Are Let’s get this out of the way: there’s no “secret sauce” for predicting the market. It’s impossible. Technical analysis isn’t about predicting what the market will do. Technical analysis is a tool for figuring out what the market’s doing now. So, before we start thinking about the market’s next move, let’s ensure we know what it’s doing now. [biden] Last week did little to change the overall market’s texture. Looking at that last candlestick, you can see the SPX rose to about 3,800, only to fall back to 3,639.66. Last week’s daily candles looked like this: [candles] On Monday and Tuesday, the market seemed assured that Jay Powell and his FOMC crew would stop hiking rates soon. Then we went into a Wednesday wobble before confidence faded on Thursday. On Friday, the Bureau of Labor Statistics revealed robust employment numbers. This not only put rate hikes back on the table but increased the probability of those hikes happening. I’ll talk more about nonfarm payrolls and the unemployment rate later. But first, let’s start using some of Simon Ree’s tools for looking at the market. Where We’re Probably Going Exponential Moving Averages The first metrics we’ll look at are the 8- and 21-day exponential moving averages. How do exponential moving averages (EMAs) differ from the simple moving averages (SMAs) I usually use? Moving averages are lagging indicators. You’ve got to look back to get them. From [StockCharts]( Exponential moving averages (EMAs) reduce the lag by applying more weight to recent prices. The weighting applied to the most recent price depends on the number of periods in the moving average. EMAs differ from simple moving averages in that a given day's EMA calculation depends on the EMA calculations for all the days prior to that day. You can [click on this link]( if you fancy learning about the mathematical formula behind EMAs. Why the 8- and 21-day EMAs? Because Simon uses them for his short-term options trading. I’m using them because I don’t want to go too far into the future. Simon considers the market to be in a bear phase when: - The market closes below the 8-day EMA. - When the 8-day EMA is below the 21-day EMA. Here’s a daily SPX chart with the 8- and 21-day EMAs overlaid: [Dollar Index] The market closed below the 8-day EMA only on Friday. So, we need another close today below the 8-day EMA to fulfill this criterium. But the 8-day EMA is below the 21-day EMA, so that’s bearish. Let’s give that a 1 out of 2 for bearishness. The Metaverse Story You’re NOT Hearing… [Click here to learn more]( Everywhere you turn, people are raving about the Metaverse. Facebook’s now called Meta. Microsoft’s CEO says, “The Metaverse is here.” Apple’s all in too. But there’s a critical piece of the Metaverse story you’re NOT hearing about… [Click here now for the full details](. [Click Here To Learn More]( Keltner Bands Again, from StockCharts: Keltner Channels are volatility-based envelopes set above and below an exponential moving average. This indicator is like Bollinger Bands, which use the standard deviation to set the bands. Instead of using the standard deviation, Keltner Channels use the Average True Range (ATR) to set channel distance. The channels are typically set to two Average True Range values above and below the 20-day EMA. [Ed. note: Simon uses the 21-day EMA instead.] The exponential moving average dictates direction and the Average True Range sets channel width. Keltner Channels are a trend following indicator used to identify reversals with channel breakouts and channel direction. Channels can also be used to identify overbought and oversold levels when the trend is flat. What’s the Average True Range, you ask? To save space, just [click here]( to find out. Here’s the same SPX chart, but this time it has the Keltner Bands overlaid: [Click here to learn more] Two weeks ago, we were hugging the 3-ATR wide (green or widest) lower Keltner band. The SPX was due for a pop, which it got last week. The SPX returned to the 21-day MA (the middle dashed black line) and then got dumped again. I’d say this is a bearish signal. Lower Lows This one is easy. We keep making lower lows. We have all year. And I suspect we’ll get another one within two weeks. [Dollar Index] Finally, good friend and Jim Rickards’ super analyst Dan Amoss had this to say on our Slack chat: You may not be surprised to know that I think we could sell off hard the next week or two. I think the CPI is likelier to surprise on the upside than the downside next week… which might be the catalyst for a final flush. I have rarely seen a chart that you showed above be a bottoming pattern. Many technicians say there are no such things as “triple bottoms.” What’s Holding Up the Economy? Dan just mentioned the CPI numbers, and I agree with him. But let’s look at the employment figures holding up the economy. Yes, the markets sold off on Friday because the numbers were strong. Here is a quick review of what happened: Nonfarm payrolls increased by 263,000 for the month, below the consensus estimate of 275,000. But it’s still a firm number. The unemployment rate was 3.5%, down 0.2%. The labor force participation rate edged lower. Average hourly earnings rose 5% from a year ago, slightly below the estimate. The bottom line is that the market thinks the Fed will continue to increase rates to quell the rampant employment numbers. If the Fed raises rates again - which it almost certainly will - yields rise, the dollar will increase, and asset prices (like stocks) will fall. It’s that simple. Wrap Up I’m not at all optimistic about the broad market. Whether you’re looking at Simon Ree’s technical signals or the underlying macro, the market looks like it’s heading farther down. This is the time for protecting yourself and investing defensively. Until tomorrow. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( Rude Awakening is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please read our [Privacy Statement](. 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