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US Stocks Break 2022 Downtrends – Setups for Nasdaq 100 & S&P 500

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US Equities Outlook:

  • Now more than +20% off their lows, a new bull market is taking shape for US equity markets. Significant technical hurdles are being cleared along the way.
  • Measures of volatility are at multi-month lows, typical for this time of year, but also a sign of growing complacency.
  • According to the IG Client Sentiment Index, the US S&P 500 has a mixed trading bias in the short-term.

A New Bull Market

US inflation is persisting at near multi-month highs while the US economy is slowing down, but that doesn’t matter for US stock markets. Neither does the repeated warnings from Federal Reserve policymakers that more rate hikes are coming over the next few months. Instead, US equity markets are taking a longer-term perspective: inflation will eventually slow, forcing the Fed to pivot away from rate hikes to a neutral stance in early-2023, before rate cuts arrive in the second half of 2023.

For now, things seem sanguine for risk appetite after the July US inflation report showed an unexpected deceleration in price pressures. US equity markets are now more than +20% off of their yearly lows, signaling the end of the bear market that defined much of 2022 and ushering in a new bull market altogether. While several technical hurdles have been cleared along the way, it’s also worth noting that complacency is starting to creep into the picture.

US NASDAQ 100 (ETF: QQQ; Futures: NQ1!) TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 1)

US Stocks Break 2022 Downtrends - Setups for Nasdaq 100 & S&P 500

With yesterday’s close, the US Nasdaq 100 broke the downtrend from the December 2021, January 2022, March 2022, and April 2022 swing highs. Prices continue to trade in context of a bullish falling wedge breakout, which ultimately calls for the US Nasdaq 100 to return back above 15,000 in the coming weeks and months. Momentum remains strong, with the tech-heavy index above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is still trending higher above its signal line, while daily Slow Stochastics are holding in overbought territory. For the time being, a ‘buy the dip’ mentality should prevail.

US S&P 500, VIX, & VVIX TECHNICAL ANALYSIS: DAILY CHART (October 2020 to March 2022) (CHART 2)

US Stocks Break 2022 Downtrends - Setups for Nasdaq 100 & S&P 500

Before examining S&P 500 technicals, a brief interlude to look at volatility conditions is necessary; they may be the only fly in the ointment at present time. The VIX has dropped to its lowest level since mid-April, while VVIX – the volatility of volatility index – has been persisting below 100 for its longest streak since early-2020. For better or for worse, while these are typical conditions for this time of the year – the summer tends to see reduced volatility as market participation wanes – these are also signs of complacency among traders.

US S&P 500 (ETF: SPY; Futures: ES1!) TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 3)

US Stocks Break 2022 Downtrends - Setups for Nasdaq 100 & S&P 500

The persistent decline in volatility has been instrumental in paving the path for the US S&P 500 to breakout of the descending channel in place for much of 2022. In tandem, the US S&P 500 also cleared out its June swing highs, suggesting that the bullish falling wedge remains the predominant pattern, which points for a return above 4,600 in the coming months. The US S&P 500 is above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD continues to trend higher above its signal line, while daily Slow Stochastics have are holding in overbought territory. As long as volatility remains depressed, a ‘buy the dip’ mindset remains appropriate.

IG Client Sentiment Index: US S&P 500 Price Forecast (August 11, 2022) (Chart 4)

US Stocks Break 2022 Downtrends - Setups for Nasdaq 100 & S&P 500

US 500: Retail trader data shows 35.63% of traders are net-long with the ratio of traders short to long at 1.81 to 1. The number of traders net-long is 4.96% higher than yesterday and 4.38% lower from last week, while the number of traders net-short is 1.23% higher than yesterday and 10.67% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests US 500 prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed US 500 trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist