A Correction As Expected

I outlined a week or so ago that US equities were looking particularly fragile, and whilst I do not believe we are witnessing a major reversal, what has occurred in the last few days was expected and anticipated in previous posts. And the reason I was confident in suggesting this was due to two factors. First the shape of the price action and second the associated volume.

And as an example, I am taking the price action for the March contract for the NQ. First, since the start of the month, the progress higher for the index has been labored with spreads generally narrowing and so creating what I call a catenary price curve where the price is rising, but at a slower pace, each day on ever-decreasing spreads. Moreover, we have seen similar price action on the ES although so far the YM has not followed suit as value stocks are once again in favor and have been supportive of the index.

So this is the reason from a price perspective but what about volume? Here the message is also clear with the decline in daily volume since late January, with each green-up candle associated with lower volume. Combine these two factors together and there can only be one conclusion which is what we are now seeing. In other words, a correction and reversal to the volume point of control anchored in the 12,900 area as denoted with the yellow dashed line. Once this is reached expect to see the NQ E-mini bottom out and move into a congestion phase, particularly as we have a well-defined level of support immediately below at12,800 as denoted with the red dashed line of the accumulation and distribution indicator which is likely to act as a strong platform as it did on January.

Finally, this week’s two-day testimony to Congress by Jay Powell comes against the backdrop of rising bond yields and inflation which are the biggest enemies of growth stocks.

(Click on image to enlarge)

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