Stock Market Near Key Support Band

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HOLDING ABOVE LOGICAL AREA

The NYSE Composite (NYA) chart below contains Anchored Volume Weighted Average Price lines (AVWAP). AVWAP assists with support and resistance, and more importantly, whether buyers or sellers control the market. Sellers took control of the market in Q1 2022 and maintained control until Q4 2022. Since the October 2022 low, buyers have slowly and incrementally regained control. Since the SPDR S&P 500 ETF (SPY) is highly correlated to the NYSE Composite Index, the developments below speak to an improved outlook for SPY.

BULL/BEAR BATTLE LINES

A zoomed-in version of the same NYSE AVWAP chart shows three key levels (A, B, and C). Between early January and late June 2023, sellers stepped up their conviction when the price popped above the upper AVWAP band. Since early July, the market's tone has shifted. Rather than attracting sellers between points A and B, buying conviction has increased, allowing the price to spend more time above the important AVWAP band. Bearish concerns for SPY would increase if sellers drove the NYSE Composite below points B and C, which sit roughly 4-8% below where the NYSE was trading during Monday's session.

A significant step for the bullish case would be to print a higher high by exceeding the July 2023 high. For now, the bulls have the advantage, but in a still-vulnerable manner.

TIME FOR LAGGARDS TO PLAY CATCH UP?

The NYSE Composite has been a laggard in 2023; the same can be said for the Dow Jones Industrial Average (DJI). The chart of the SPDR Dow Jones Industrial ETF (DIA) below was first shown in a July 21 article to demonstrate DIA could be in the early stages of a new bullish trend.

If we look at an updated version of the DIA chart (below), the third step for a probabilistic bullish trend change that was completed in July is still relevant. Thus far, DIA has consolidated above the Q4 2022 high and an upward-sloping 200-day moving average. In 2022, DIA spent a good part of the year below a downward-sloping 200-day. In 2023, DIA spent most of the year above a flattish-to-upward-sloping 200-day moving average, which is indicative of a favorable longer-term trend.

CONVICTION SIDES WITH BULLS

Charts are a reflection of human behavior. A noticeable shift in behavior has taken place on the DIA AVWAP chart below. In the first half of 2022, selling conviction increased near the downward-sloping red AVWAP line tied to the 2022 high. The conviction of buyers and sellers became more balanced between June and October 2022, allowing DIA to make a stand near the orange and dark blue AVWAP lines from the COVID high and low. Since late 2022, DIA has spent a considerable amount of time above both the red AVWAP line tied to 2022 high and the light blue AVWAP line tied to the October 2022 low, telling us that market participants have more confidence about future economic and market outcomes in 2023 relative to 2022. In its present form, the chart below says the 2022 bear market is over and the rally off the October 2022 low is still intact.

DIA has lagged SPY in 2023. Evolving bullish evidence in laggards (NYA and DIA) is a good sign for market leaders, including SPY.

SECULAR TRENDS AND DEMOGRAPHICS

The charts above align with the market's long-term trend, favorable demographics, and recent signals from high-yield bonds and the NASDAQ 100, telling us to keep an open mind about better-than-expected outcomes between now and 2035.

MORAL OF THE STORY

In recent weeks, sellers took control of the short-term trend, but thus far have done little to flip the longer-term trend script. Consequently, we will continue to give the primary bullish trend the benefit of the doubt until the evidence shifts in a meaningful manner.


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