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A bearish breakdown to a bullish setup is most bearish, what's next? - Thomas Ng 23 Jan 2022

Updated: Jan 29, 2022

On Mon 24 Jan 2022 3.32pm, I emailed Clients my latest post titled 'A bearish breakdown to a bullish setup is most bearish, what's next?'

PATREON subscribers receive it on 24 Jan too. To subscribe to PATREON, pls click here.

'Dear Clients


What a kickoff to the market of stocks for Jan! I've so many things to share with you so let's get to the chase!

S&P500 Index Chart Daily, 10-mth

Ref to my previous post dated 22 Dec, I mentioned that I favored upside or flattish short-term resolutions to SPX (S&P500 Index). The upside target (from the bullish Cup & Handle pattern) is around 4940, as depicted on my 22 Dec Chart.


The 1st week of 2022 saw price action break up & out which affirms my bullish bias (green zone).

However, by 18 Jan, SPX price action has sustainably dropped back into the neutral yellow zone and has sliced through the a) Bollinger Bands (BB) midpt line, b) 50-day EMA & c) 1-year uptrend line. As appropriately mentioned in my last writeup, all good Technical Analysts cover all ground and this recent failure of the original bullish setup definitely kicks in the alternate scenarios discussed in my 22 Dec writeup.


Now, a bearish breakdown to a bullish setup is perhaps one of the most hated structures in Technical Analysis as newly trapped traders from that bullish breakout joins in to cut their losses fast which then adds on to the downside pressure.

Together with Options Expirations that occurred on the 3rd Friday of every month (ie 21 Jan), the downside action is likely a response to both the 'bearish breakdown to a bullish setup' AND also an unusually large amount of mega-caps call options expiry* (see Reuters link below).


*what happens when you have an OTM (out of the money) call option? Yup it expires worthless. And yup nobody says the market was supposed to be fair!


2. The bad news:

As I was preparing this writeup in the mid of last week, I was watching the SPX 4500 level (the level between yellow & red zone on the Chart). A sustained break below 4500 will see price action entering the pink zone which I have laid clearly on the 22 Dec Chart. With the 4500 level being breached authoritatively, the downside target at 4240 has opened up.


3. The good news:

Barring a direct price crash to said downside target, with the Bollinger Bands so stretched to the downside; RSI going into oversold territory (< 30) not seen since Mar 2020 covid lows and MACD also notching a new low (also not seen since Mar 2020), a short term bounce these 1-2 weeks is likely due. Of course, price action can still extend downwards to the next support level & I will be a happy buyer of stocks or SPY ETF between SPX 4300 - 4164.


4. 'But the FED is raising rates soon!'

For those that says it's doomsday bcos Powell's gonna hike rates 3-4 times this year, pls see below Ken Fisher's twit and a few of his interesting charts about what happened when the Fed began a rate hiking phase:


In fact the very action that FED is finally raising rates signals two things to mkt participants:

a) uncertainty (about when the phase is starting) is removed

b) the 'perception' that the FED is in control**

**Note: now whether the FED is really ahead of the curve is a topic yet for another day..

5. As of Friday 21 Jan close, SPX is down 8.8%. While we have not seen a correction this far since this covid rally kicked off from the lows of March 2020, I strongly believe this may be just the correction that we have been waiting for, before the next post-pandemic bull market takes off in earnest. Assuming price action does hit my downside target at 4240, the drawdown will be about 12%, which IMHO is still considered a garden variety correction. So watch this space!


If schedule allows, i will be writing up something for STI, HSI & Precious Markets too. I reckon both HSI & the precious metals complex are looking to be in a sweet spot already or very soon.. Remember, always 'Skate to where the puck is going, not where it has been'!


Live Long & Trade Well & have a Joyful & Blessed Lunar New Year!!


Thank you & regards


Thomas Ng, CMT

Principal Trading Representative



Chart source: tradingview

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