Doji candle may indicate a market bottom

“… There have been two encouraging technical developments for the bulls. The first is the area where the SPX fell earlier this month, which was 20% below the all-time high of the SPX close and the end of 2021. Note that this drop was also near 3852, which is the close of SPX when the president took over Joe Biden took office in January 2021… One need look no further than March 2020, when the SPX index fell in the 2270 region, where the index was trading when Donald Trump, Biden’s predecessor, took office in January 2017. One The main differences between now and then is that in 2020 we were on the cusp of a major fiscal and monetary stimulus, while the Fed is now raising interest rates and no longer buying bonds, fiscal stimulus is a thing of the past.

Morning forecast for Monday, May 29, 2022

As May ended last Tuesday, long-term bulls added another piece to the tricky puzzle, as the S&P 500 (SPX – 4,108.54) closed above its 24-month moving average, rising from a multifaceted support area – Like discussed in the snippet above – earlier in the month. Specifically, the index closed the month above its 24-month moving average, giving new life to bulls who had been on life support devices just weeks ago.

While the May close doesn’t definitively point to a bottom, as I suggested last week, it may give some of you a reason to get back into the water, or if you have the urge to do more than toe, use all three a week’s volatility dip, according to the Cboe Market Volatility Index (VIX). – 24.79), to hedge long positions.

As a quick side note on this VIX pullback, note on the three-month daily chart below that since returning above the level that coincides with its 50% YTD gains on April 22nd, it has been oscillating between levels that coincide with the 50% and 100% above the 2021 close at 17.22. Buying calls on VIX futures is still relatively low relative to the long position, indicating that VIX may pull back further in the coming weeks and break the current pattern.

Win three months VIX

There was another interesting piece on the May close where the monthly candle was a Doji. In other words, the opening price for May (4130.61) and the closing price (4132.15) were almost the same.

Doji candles on the monthly chart are not common. With the use of doji candlestick patterns as a signal of the possible end of an ongoing trend, the doji candle piqued my interest, as it did in a month when the 24-month moving average was tested. As such, I referred to a monthly SPX chart in order to look for other events in which the SPX had a monthly doji in the midst of a correction or bear market.

I found eight previous cases since 1990. All but one (August 2002) indicated a large bottom. In the case of August 2002, the SPX did not decline until six months later, ironically, it was also a Doji month.

In the case of October 1992, a strong rally occurred after months of sideways movement. While there is a possibility that this will be August 2002 and the monthly May 2022 Doji on SPX does not indicate the end of the trend, bulls can count on this date for now. According to my comments in parentheses, there are some commonalities in the May Doji occurring in the 2-year moving average, although most cases saw a decline in the 12-month or 1-year SPX moving average.

SPX dogs

Doge SPX 90-99 months

SPX Doji Months 2000-2010

SPX Doji Months 2010-2023

But if you stick with stocks, you may want to consider easing again, as there is still potential significant resistance from 4170, the March closing low, and 4375 above. The way the market behaves around these levels, if tested, may tell us whether this is a short-term rally in a bear market or a long-term rally. For example, if SPX fails to take out both of these levels, and then goes back below the 24-month moving average, the odds of violating the recent lows will increase. But a move above these resistance levels should boost prospects for a long-term rally on the horizon. “

Morning forecast for Monday, May 31, 2022

While the longer-term charts look encouraging for the bulls, this is far from an “all-clear” signal flashing, particularly in the context of mixed sentiment indicators – some showing extreme negative limits, such as the SPX and Nasdaq -100 index buy options (NDX – 12548.03) Component. At the same time, we’ve seen inflows into technology exchange traded funds (ETFs), and outflows from broader market ETFs.

The rebound from the May lows was impressive, but according to the excerpt above, there are immediate resistance levels one might use to confirm that last month’s low has staying power.

For example, my comment on Thursday June 2 on Twitter proved premature, as the SPX close barely got back above its June 2021 and March 2022 lows in the 4165-4.170 region and was quickly met with sellers in Friday’s trading.

This may indicate that if this level is used to gain permission to return to the market with additional dollars, it may be better to wait for a weekly close above this level or at least two daily candles in which the high, the low and the SPX close above this resistance area. Additionally, I find it interesting that Thursday’s close was roughly the same as the May 3 close of 4,175, the night before the Fed’s latest rate hike.

There are other resistance levels to consider, whether that is the October 2021 and January 2022 lows at 4300, or the trend line connecting the March-April lows, which starts the week at 4280 and ends the week at 4250.

Finally, the 4,375 level should not be forgotten, as this is the level where SPX saw a short-term breakout above the trend line connecting the lower highs of January and February, with the April 22 break below this level resulting in a sharp sell-off in the latter part of the month. Past.

In short, the SPX monthly candles chart with a 24-month moving average is encouraging for bulls, as there is a lot of history on their side. But with the Fed raising interest rates and the unclear path how far it will go to fight inflation, the jury is out on whether several levels of resistance are impenetrable.

If you stay patient about allocating more dollars and use the SPX price action to guide you, there is not much risk if sellers emerge in these resistance zones I have indicated to you. But if SPX makes a convincing move above each of these levels, you can steadily increase your dollar allocation to stocks if the last month proves to be a big bottom.

SPX Daily Leg-In

Todd Salamon is Senior Vice President of Research at Schaeffer’s

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The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.