Bear Market Continuation or Bullish Reversal?

Research
July 7, 2022

Since the beginning of 2022, markets have been struggling in a substantial way. Everything from stocks, to commodities, to crypto have suffered in this major correction.

Today we will cover the short to midterm future of the stock market and how that will effect things moving forward.

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Ever since reaching its top in early January of 2022, the S&P 500 has fallen over 19% to 3,902 where it is currently sitting at. The NASDAQ suffered a similar fate, falling nearly 26% to 11,621. With both these indexes falling so much, it brings up the question of whether we are nearing the end of this correction or are we expecting another leg down? Let's look at some of the charts below to help us paint a better picture.

Back in January 2022, the Stratus Squeeze indicator signaled that bearish price action imminent. Bearish momentum broke out of the clouds which began the correction that we are in right now. Now, that bearish momentum looks like it may cross down with the overall trend, which may lead to a potential rally. This does not assure the end of the current correction. The cross down may very well quickly reverse and the market continues selling off. We must watch how this plays out in the upcoming weeks to get a better understanding of where the market is headed.

SPY Weekly Chart

The last time that the Stratus Squeeze crossed down was after bottom of the March 2020 crash. Once buyers began stepping in, the markets rallied and the Stratus Squeeze signaled that bearish momentum was dying out.

SPY Weekly Chart (March 2020)

Another important factor to watch is the relationship between QQQ/SPY. Taking a look at that chart below, we can see that QQQ/SPY is currently sitting at a major trend line support level. Taking all of the above mentioned points into consideration, it is evident how important of a level this is. If price action holds here, establishes a base, and begins rallying, we may see a start to the end of this correction. On the other hand, if price action drops below this level, it may signal that this is correction is going to continue.

A drop below this level would lead to underperformance from the QQQ when comparing it to SPY.

QQQ/SPY Weekly Chart

With the Stratus Squeeze indicator showing that bearish momentum is beginning to flush out, we may indeed see a reversal in the markets at these levels.