We are only a couple of weeks into 2023 but we are already seeing that this year looks to be very interesting. If you haven't noticed, the S&P 500 is leaving us many clues on a technical level. It doesn't matter if you are not Sherlock Holmes and you have not seen them; We bring you three clues that indicate the potential rebound that we can witness in investing in stocks.
1. Bearish trend acting as resistance.
Many times traders become obsessed with analyzing charts using thousands of technical indicators. But there are times when it is as easy as using guidelines to be able to see clearly and predict the next movements. That is precisely what we have done, since the S&P 500 is repeatedly colliding with the main trend guideline that has accompanied us throughout last year. Fortunately for us, the recent rebound in demand is driving prices up to a level that is acting as very tough resistance. The approach to this level raises selling pressure, but what happens over the next week could determine the next major move for the S&P 500.
The guidelines allow us to analyze asset prices in the short and long term. These are defined by joining at least two points on a chart and are usually enlarged to be able to see the possible resistances (or supports) that the price may encounter in the future. The bearish trend (in yellow) starts from the January 2022 high and connects with the lower highs of March and December, extending to just above the most recent closing level of 3.990, around 4.015. This tells us something important: if the S&P 500 manages to break slightly higher and close above this trendline resistance, that move could act as a trigger for bullish momentum. This is because many quantitative investors will see that breakout as a major buy signal.
2. Testing moving averages.
Nor can we forget to observe the moving averages when analyzing graphs. They can serve to indicate support (a floor) or resistance (a ceiling) for an asset because many investors use these levels to determine when to buy and when to sell. If we now look at the S&P 500, we can see that it is currently trading at 3.928, slightly above its 50-day moving average (yellow line) of 3.902.
A similar situation occurred twice in December: the index managed to rise above its 200-day moving average (3.990), but then failed to overcome the trendline resistance. As many chartists They say, a single moving average isn't all that useful on its own: you need at least two to help create a "crossover." A crossover occurs when a faster moving average (that is, one that covers a shorter period) crosses a slower one. In the chart above, the index's 50-day moving average is around 3.902, below the 200-day moving average. Therefore, we should wait for a crossover of the averages to have a reliable buy signal (better known as a “golden crossover”).
3. Confidence levels.
Weekly, the American Association of Individual Investors (survey AAII) publishes surveys on investor confidence in the market on its website. And it is a valuable contrarian indicator. Above-average market returns have often followed unusually low levels of optimism, while below-average market returns have often followed unusually high levels of optimism.
As we can see, the survey shows us that sentiment has moved towards neutral territory. Pessimism (i.e. bearishness) among retail investors about the near-term direction of the stock market fell last week to its lowest level in 10 weeks. Neutral sentiment also retreated, while (bullish) optimism has rebounded. Expectations that stock prices will rise over the next six months rose to 24%, up from 20,5% the previous week.
But let's not claim victory with that level of optimism. It has been below its historical average of 37,5% for 54 consecutive weeks and has remained at unusually low levels for seven consecutive weeks. So, although sentiment has improved, optimism remains moderate among both retail and professional investors. That, at least, means that if a breakout to the upside occurs, there is room for sentiment to improve and give more momentum to this rally.