Not out of the woods but expecting a reversal (up) again - Thomas Ng 1 Sep 2022

On Thursday 2 Sep 2022 12.05pm, I emailed Clients my latest post titled 'Not out of the woods but expecting a reversal (up) again'.

Below is the full transcript for your perusal:

'Dear Clients

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*I've completed this writeup late Thursday night (1 Sep) which I reckon was too late to be blasted out. So this morning I've updated the S&P500 Index (SPX) chart*

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Supposed to send out my monthly posting last week but alas I had 4 meetings back to back thus the writeup was postponed. Nevertheless Mr Market has obliged very well to what I had said in my last post dated 25 July. The only thing that I have not mentioned then was what happens after Mr Market gets into my green resistance zone! The answer to this will be shared in today's post.

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First let's recap what I have said in the last few months:

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1) 23 May 2022 - Are we there yet, Mr Market??

'..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+/-..'

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The SPX bottomed on 17 Jun 2022 at 3675 (closing px) before mounting a 18.8% rally into late August..

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2) 27 Jun 2022 - Green shoots on the horizon??

'..My SPX 4000-3900 blue support zone & 3700 downside pattern target showed great support significance as price action bounced off rather quickly from both levels..'

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'..we do have some interesting developments across intra-markets I'm monitoring and yes they are showing me the proverbial 'Green Shoots' that Bulls are finally summoning more enthusiasm in making a real comeback..'

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That 'green shoots' post thereafter gave us a continual 11% rally, not bad for being 'proverbial'!

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3) 25 Jul 2022 - Mr Market has been obliging my bullish script very nicely!

'..Now for the record, my bias is towards a continual upward rally towards the SPX 4233 - 4366 levels which corresponds to the 50% & 61.8% Fibonacci retracement levels. Textbook stuff, no sweat..'

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The S&P500 Index (SPX) rallied to a high point at 4325 on 16 Aug 2022 which is right smack at my target sweet spot or just 41 points away from higher target band.

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So far, no sweat. :)

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But what's next?

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With price action turning down from my targeted green zone & exactly at the red downtrend line (see Chart below), I thought the playbook was getting a tad too easy.

Given that now price has retraced >50% back down into my blue zone again, I will not be surprised to see a sudden turnaround in price back up. If you recall, this said blue zone has been there on my Chart since April and has acted as both resistance & support when price action revisited this zone from both directions multiple times.

S&P500 Index (SPX) Chart, 10-mth

Again at this point, we bring in my 'Bollinger Bands Strategy' playbook:

When price starts to turn back up from this 4-day selldown, I would like to see price action taking out the midpoint line of the Bollinger Bands authoritatively and remain in the upper segment of the Bands to demonstrate that the bulls are still in charge.

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Anything less than that, price action may be stuck in neutral gear.

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One major concern as we move into Sep & Oct is the annual Negative Seasonality for the US markets, i.e. historically Sep & Oct are seasonally the worst 2 months of the year saddled with negative returns for the US stock markets. (Based on historical seasonal trends, September is the weakest month for the S&P 500, with an average decline of 0.54% since 1950).

Negative newsflow during these 2 months tend to cause market participants to 'react' more adversely than normal.

A sustained move below 78.6% Fibonacci retracement level at 3784 will thus make me reassess the premise that the (Jun) bottom is in place. Smaller probability IMHO, but cannot be ruled out.

My bias is still towards a positive resolution to this 2-mth rally, but let's watch what the Tape is telling us as we move into Sep & Oct.

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Conclusion in Layman's terms:

My posts of the past few months have correctly tracked SPX 2-month rally with utmost precision.

Currently with the 4-day pullback in SPX which is approaching 'oversold', I'm expecting a bounce and the Bulls would need to prove soon that they are still in charge by occupying back into the upper segment of the Bollinger Bands. Anything less than such bullish action may see price action meandering into neutral or ranging markets.

However, given annual Negative Seasonality at play, my utmost concern is that price action breaks down below the 78.6% retracement level at 3784 which will likely make me reassess the premise that the low is in place.

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We are not fully out of the woods yet, so let's take a step one at a time.. Queries welcome.

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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

www.thom-ng.com

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#plsreaddisclaimer #chartforillustrationonly #spx1sep22 #bullishbias #notoutofwoods #befluid #wytant #livelongandtradewell

Chart source: tradingview'