Equity Markets Update

What a month it has been thus far across all major markets post the Fed decision of hiking 50 basis points. When the Federal Reserve Chairman caught the whole World off guard about not considering increasing interest rates by 75 basis points it came as no surprise that investors and traders alike knew how behind the curve the Federal Reserve has been and continues to be about taming inflation. Since the decision the markets have seen a precipitous decline across the board. 

NASDAQ 100 (NASD: $QQQ):

The tech sector has been following the most basic harmonic ABCD pattern preciously all year. Although the chart below looks messy, it shows what investors and traders need to know. 

A brief summary of the price action YTD:

1. We had an initial ABCD pattern complete from the January highs to Mid-March which made the long A-B leg. 

2. Thereafter we had a pullback to the 200-period simple moving average which was preciously a 61.8% retracement, and headed lower thereafter. 

3. We’re currently at the 100% extension where we saw a big bounce on Friday, but with low volume. 

4. The typical extension for a 61.8% retracement is the 161.8% retracement which would yield a 229.53 price target for the $QQQ. 

The next week or so will be key as to whether we see a bounce up to the 20-period simple moving average which has a price point of 319.50, or whether this was just a short covering rally as traders did not want to be short going into the weekend given any headlines that could follow. One thing is clear – nothing that got us into this decline has been resolved hence, caution remains to the downside regardless of any rallies. 

S&P 500 (ARCA: $SPY):

The S&P 500 represents a broader market perspective than the NASDAQ 100, but nonetheless the price action is similar, but with differentiated behavior.

A brief summary of the price action YTD:

1. We had an initial ABCD pattern from the January highs completing right at the start of March.

2. The longer ABCD formed its initial A-B line after the above mentioned ABCD pattern completion. 

3. Price retraced back to the 78.6% retracement and above the 200-period simple moving average in volatile price action. This type of secondary Fibonacci ratio is only found when the price action becomes more volatile than normal. 

4. Price action managed its way down below the 200-period simple moving average only to form a cup, and a formal head and shoulders pattern as outlined in the chart below. 

5. But once again, it was a fake out as price bounced off the 200-period simple moving average and headed lower in a violent and volatile fashion. 

6. The typical extension for a 78.6% retracement is a 127.2% extension which suggests the $SPY could potentially be he headed lower if it is to complete the pattern in the [374-376] range. 

As with the NASDAQ 100, we are in a wait and see approach to determine the direction for $SPY. Either the price action could lead higher to the 20-period simple moving average which has a price point of ~420, and then bounce lower, or we could be headed lower outright. As also with other indices and markets, nothing has changed in terms of what has gotten us into this down trend hence, caution will continue to remain to the downside. 

VIX (CBOE: $VIX):

The S&P 500 volatility index is in an interesting position as its close to invalidating the upper C-D leg of the ABCD pattern if it continues to head down to the 200-period simple moving average. There is a slight gap that will end up getting filled between the last two bars, but depending on price action it could be sooner or later. If price does end up making its way back to the 200-period simple moving average then recent history has told us it acts like a babies bounce house in just bouncing right off of the moving average and making highs. 

Overall, this is an event driven market mainly by economic news and data and what various members of the Federal Reserve Board of Governors come to say. Over the coming week and weeks to come we will continue to get major economic news and various members of the Federal Reserve member banks speaking and giving us there take on monetary policy. The markets will react to what the data shows and what gets said as everything else – especially good earnings are being ignored.