A Wave Of Price Or Time Consolidation As Quarter End Nears: Weekly Nifty 9

Welcome to another trading week!! In appreciation of all of our daily readers of finomgroup.com content, we offer the following excerpts from our Weekly Research Report. Our weekly report is extremely detailed and has proven to help guide investors and traders during all types of market conditions with thoughtful insights and analysis, graphs, studies, and historical data/analogues. 

Research Report Insight #1

Prior to this past week, the S&P 500 had consolidated 4.5% from its peak in January. In February, the S&P 500 began another 4%+ correction and it may have culminated with a 5.8% correction this past week. Now let’s look at a the 1-year chart of the S&P 500 to get a better idea of the present conditions and where we’ve been.

What we can see in the chart above is that the S&P 500 held a close, on Thursday, below the 50-DMA and below the lower Bollinger Band. This is usually a sign of oversold conditions, which were also indicated in the final week of October if you walk backwards in the chart.

  • The 50-DMA resides at 3,819
  • Above that, the 20-DMA resides at 3,885
  • While the S&P 500 did break below the long-term trend line support (purple line) briefly, it managed to close above this trend line and the 50-DMA for the week.

What I believe to be good news for the bulls, regarding the recent 5.8% consolidation in the S&P 500, is that price did not get back to the January “swing low” (3,694 and 3,714 on a closing basis). This essentially means that we have not made lower lows after making higher highs. This is still just a normal consolidation pattern within a cyclical uptrend. Could the market still consolidate down to the former swing low? Certainly that is one probability, but market breadth continues to prove resilient and points to the need for a greater downside catalyst. Something possibly other than normal and to-be-expected rising yields.

Research Report Insight #2

The Nasdaq is not out the dangers of correcting further, either for price or time, and simply due to the sharp rally off of oversold conditions.

As we can see from the percentage of Nasdaq stocks trading above their 10-DMA, the oversold conditions resolved higher, but still in consolidation territory. The percentage of Nasdaq stocks trading above their 50-DMA, with the index still below its 50DMA, is also in the 30%ile range. Having said that, there remains strong reason to believe that this is also a normal and to-be-expected correction as the number of Nasdaq stocks above their 200-DMA, the longer-term moving average, remains healthy at 70 percent.

I’m of the opinion that the Nasdaq, after a 12.5% correction to-date and at one point this past week 2 standard deviations below its 50-DMA, the most oversold it has been since March 23, 2020, COVID Crash low, is in a bottoming process. One of the issues suggesting investors need to keep an open mind when it comes to the Nasdaq is that corrections “eventually” fall back to the lower 9-month -1.5 stdev. Bollinger Band. That level wouldn’t be achieved until the Nasdaq hits 10,137. The data set only goes back to 2011, so there’s that!

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