On Monday 23 May 2022 4.36pm, I emailed Clients my latest post titled 'Are we there yet, Mr Market??'.
Below is the full transcript for your perusal:
'Dear Clients
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Hope you are doing well! It has been a month since my last writeup and let's take a look whether Mr Market has been obliging my blue support zone for SPX (aka S&P500 Index) laid down in my last post!
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On 25 Apr 2022, I mentioned that:
'The other high probability downside target would be around the SPX 4000 - 3934 range (blue rectangle in Chart). Said support range has been communicated to Clients in my previous writeups so it should not come as a surprise.'
(Reference: https://www.thom-ng.com/post/allow-the-correction-to-complete-we-must-thomas-ng-25-april-2022)
S&P500 Index aka SPX Daily, 1-year
As you can see from the above SPX chart replacing 'Candlesticks' price with 'Line' price (black line shows daily closing price), you will note that price action attempted to do a bounce off the lower end of the blue support rectangle (zone) on 12 May 2022.
My blue zone is showing significance as Bulls & Bears continue to battle it out in this region for supremacy.
Now, while last Friday's (20 May 2022) price action did close below the blue zone, I'm going to give it some benefit of doubt due to Friday's OPEX (options expiration day happening on 3rd week of every month) which is known to give more 'turbulence' to the market place than usual.
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So as we kick off this new week, we need to watch out if this blue zone will truly put a backstop to this current correction or will the proverbial 'next shoe' start its drop to SPX 3700+/-**? IMHO, we are probably just days or weeks away from the bottom.
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**Note SPX 3700 was the worst but low probability scenario as already described in my 21 Feb 2022 writeup due to the sustained execution of the bearish Head & Shoulder Formation. Read more on this here: https://www.thom-ng.com/post/let-it-go-thomas-ng-21-feb-2022.
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However, while there are quite a few other contrarian indicators that already shows the market being very stretched to the downside (eg NAAIM Exposure Index, AAII Investor Sentiment Survey, Put/Call ratio), I must admit there is just 1 more important indicator that hasn't quite tick itself off the list of boxes for a truly solid bottom yet:
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Most solid bottoms in SPX tend to note the VIX index (aka 'Fear Index') rallying to 38 & above.
As you can see from the above CNNmoney Fear & Greed index (click here for daily updates - https://edition.cnn.com/markets/fear-and-greed), all components of said Fear & Greed index are already showing 'extreme fear' in the market except VIX index which has not yet breached 38 & above.
Given that the S&P500 Index just booked its seventh consecutive weekly decline, marking only the fourth time in history that this has occurred, you would have thought VIX should have sky-rocketed by now?
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Do note all the mentioned indicators above (including VIX) are contrarian indicators of sentiment reading. Basically, it tells you the 'condition' of Mr Market but it is not an exact buying/selling signal per se.
Thus, such a sentiment reading will not tell you the exact time the bottom is going to happen. Eventually they will but it may often be frustrating to wait for that moment to appear.
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Layman's Conclusion:
Based on quite a few Contrarian Indicators, SPX is very stretched to the downside and likely due for a bounce and then some. I will not be surprised to see just a bit more 'quick & intense' pain (selldown) before the whole ship finally turns around.
Thus call me evil, I would like to see the lowest probability scenario occurring right now which is a final flush to 3700+/-. That should likely be sufficient to get that VIX to >38 and finally turn SPX around.
As mentioned before, I'm a staggered buyer of SPY (S&P500 Index ETF) around here.
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Live Long & Trade Well!
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Thank you & regards
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Thomas Ng, CMT
Principal Trading Representative 首席股票经纪
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#plsreaddisclaimer #chartforillustrationonly #spx20may22 #putcallratio #vix #fearindex #contrarian #befluid #wytant #livelongandtradewell
Chart source: tradingview'