Stock Indexes Rejected At Resistance Signal Another Correction

January will be the month to watch. If the market closes with a positive January, we almost always have a strong year for stocks. But if not, we could be in for a doozy of a bear market in the first half of 2023.

This week we had more hawkish Fed talk on Wednesday, suggesting that rates will remain higher for a longer period of time. This week’s economic reports for November showed a drop in retail sales and manufacturing, which raises concern that the economy is weakening.

Falling bond yields are also hinting at a recession in 2023, as are falling commodity prices. Stock indexes look to have had an exhaustion gap higher, followed by heavy institutional selling after the CPI data came out. This further confirms my thinking that money managers are unloading shares into every rally possible before the next major leg down for stocks.

Dow Jones Index – Daily Chart

The DIA ETF has failed to break out and extend past the August high. There is potentially a long way for this index to fall before finding support at the Oct lows. The next couple of months could be rocky for the buy and hold hope investors who have Stockholm Syndrome and refuse to manage risk and, by doing so, turn a blind eye to protecting their capital and retirement.

S&P 500 Index – Daily Chart

The SPY index ETF has been rejected at its falling trend line again. And while my trading strategies never use falling or rising trend lines, this goes to show how they can help you spot possibly resistance levels on the chart. I don’t show the 200 SMA on this chart, but it also is at the same level helping to act as overhead resistance.

The nice thing about following price action using technical analysis and following strict position and risk management rules is that we can avoid market corrections and profit from them at the same time.

Chris Vermeulen
Chief Investment Officer
www.TheTechnicalTraders.com