By: Tom Gentile
on March 30th, 2022
Tuesday, the market started its sell off after the comments from Fed Chairman Powell say about 12:30 pm US ET.
Chairman Powell said the Fed is prepared to use all the tools at its disposal to combat inflation. We heard that the week prior when he raised rates a quarter of a point. He re iterated they are prepared to hike rates at 50-basis points if they deem it necessary and that caused the markets to sell off.
The markets rallied off their lows to at least close at their open price of the day, which if you look at a style of technical analysis chart view called Japanese Candlesticks (which I will teach more in later Market Insight articles), the days candle looked like what’s called a ‘Doji.’
Wednesday was a Different Story
I will show the chart on the ETF I use to represent my take on US equities the SPY. It is the ETF that has as its goal that of replicating the returns and performance of the S&P 500 Index.
Yesterday the doji day happened and this was the day after the SPY closed at its trading day highs and above the 50-say Simple Moving Average (SMA), which could be looked at as the SPY is breaking out above the 50-day which could be looked at as a bullish signal prices could continue higher.
But that doji day yesterday called in to question if that momentum up to that point had legs to keep going higher or is that indecision day a sign of potential bearish price action to come and that breakout failing.
Based on yesterday’s price action the equities markets did NOT sell off and in fact traded higher.
That made for a third consecutive day where the SPY closed above its 50-day SMA and for conservative traders that provides conviction for the trend to continue.
More aggressive traders only need one day close above the SMA of their choice, but again, a more conservative choice is to wait for three consecutive closed and Tuesday we got the third.
Caution About Getting Too Bullish
One concern about this recent price action in the markets is it has happened on declining volume.
Well, today the markets are selling off and I can’t say how far back it will sell off, but a test of the 50-day SMA is a possibility. Even though, it did close above the 50-day SMA it did realize a bearish reversal day. The DIA the Diamonds ETF that tracks the Dow did in fact close below its 50-day SMA today.