The Path Of Least Resistance, Part II - A Crash Is Coming

Read Part 1: The Path Of Least Resistance - Are The Markets Ready For A Bigger Correction?

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The stock market ended the week sharply lower, with SPX falling more than 200 points or 5% for the week.  In anticipation of a hot CPI report, stocks started to slide on Wednesday afternoon.  The decline accelerated on Thursday.  On Friday, the latest CPI reported showed a +8.6% rise in May, which prompted more, heavy selling on Friday.

Back on April 18, I wrote an article, titled "The Path Of Least Resistance - Are The Markets Ready For A Bigger Correction?".  Following that article, the markets fell for 4 straight weeks.  On May 18, I thought that stocks had come down quite far, and were perhaps ready for a bounce and I wrote, "It's a bit difficult to chase the downside right now. Let's see how the SPX does with this 4000-3970 range."  Since then, stocks have bounced, until these past couple of days, in which the major market indices pretty much gave up all that they've recently gained.  SPX is now back down to 3900, Nasdaq closed at 11340, while DJI is back to visit 31390.  Let's take a look the charts:


SPX (weekly)


As we can see from the SPX weekly chart, it is back down to test the support at 3900.  All SMAs have extended their downward tracks.  What's new is that the 30-Day SMA has now crossed below the 50-Day SMA, adding to the downward pressure.  The next support is at 3600.  However, there is a gap between 3600-3500; therefore, filling that gap would make a more solid support.


DJI (weekly)


The Dow finished the week at 31393, basically showing parallel development as the SPX (ie. re-visiting the previous support).  The Dow's next support is at 29000; it also has a gap existing between 29000-28300.  However, the Dow is only down 15% from it's peak, comparing to SPX's 19%.

We really haven't seen this kind of development in the weekly charts of the market indices in the past decade, or perhaps more.  This decline is still very orderly, which gradually makes the environment more and more bearish.  The Fed is determined to contained the inflation, but, the inflation certainly can't come down with the stock market still riding high.  Since the low of March 2000, due to the COVID pandemic, the stock market more than doubled!  Even with the recent fall of 15-20%, the market indices are still way up. The stock market is a two-way street, and right now, the side with the least resistance is "down".  As the SMAs' downward curvature become exceedingly steeper, the selling will become heavier.  This eventual development will perhaps take another couple of months, as VIX right now does not seem to have room to run much higher (recent tops can't seem to break 36). 

Financial stocks were particularly weak on Thursday and Friday.  A group of stocks that has held up really well are the health insurance stocks, the likes of UNH, CI, ANTM, and HUM.  I think UNH is ready to get a much bigger fall.  FDX and UPS tumbled on Friday on higher oil prices.  I think these are looking to drop more next week.

Happy weekend and HappyTrading! ™

Disclosure: Please remember that past performance may ...

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Flat Broke 1 year ago Member's comment

By the looks of my portfolio, the crash is already here :(

Andy Wang 1 year ago Contributor's comment

Then, maybe come and trade with me. =)