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Bullish breakout invalidated, divergence between SPX and HSI

업데이트됨

Yesterday, the S&P 500 Index succumbed to market pressures and fell below the critical resistance level of $4,200. By doing so, SPX invalidated a bullish breakout above the narrow range (the zone between $4,050 and $4,200) and retraced very close to the 20-day SMA. This development might suggest exhaustion for the rally, but it is still too early for bears to call a victory. Therefore, to confirm the continuation on the downside, we would like to see the price break below the 20-day SMA and test support near $4,100 (and later near $4,075 and $4,050). On the contrary, to support a bullish case, we would like to see SPX breaking above the narrow range. In regard to technical indicators bolstering a bearish case, we would like to see RSI, Stochastic, and MACD (on the daily time frame) decline along with the price (and simultaneously, DM+ and DM- converging). To support a bullish view, we would seek divergence between DM+ and DM- and reversal (to the upside) in RSI, MACD, and Stochastic.

Besides these developments, we want to bring attention to another subject: the Chinese stock market. A big emphasis was placed on China’s reopening in early 2023 after more than two years of lockdowns. In fact, the main narrative in the media was that this reopening would spur demand and help to divert the economic slowdown in the West. Consequently, we saw a rally in the U.S. equities coinciding with a slight rebound in some economic activity (but with the still relatively mixed big picture). During this time, we saw a high correlation between SPX and Hang Seng persist. However, in the last four weeks, Hang Seng has been increasingly diverging from SPX. That catches our attention as the excuse of recovery in China was used to prop up the Western markets, but now the Chinese stocks are seemingly rolling over (with Hang Seng losing 16% already from its 2023 high). We believe that if the selloff in the Chinese market continues, it will likely weigh on the thesis about recovery and dodging the recession.

Illustration 1.01

Illustration 1.01 shows the daily chart of SPX. The orange line represents the Hang Seng index. A strong positive correlation can be observed between SPX and HSI in the period between November 2022 and April 2023.

Technical analysis gauge
Daily time frame = Neutral
Weekly time frame = Neutral
*The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.

Please feel free to express your ideas and thoughts in the comment section.

DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.

노트

SPX tests the upper bound of the narrow range; if it succeeds and breaks above the resistance, it will suggest continuation higher in the short-term/medium-term.

노트

A bullish breakout is invalidated again.