Equity Technical Forecast Q4 2022: High but not very high

US stocks near year-to-date lows and there were no signs of a reversal. It uses three benchmark indices: The Dow Jones Industrial Average (DJIA), the S&P 500, and the Nasdaq Composite This section tries to answer the following questions: How far into the current downturn are we? How many disadvantages will there be? More importantly, what are the trends in the next few months?

But first let’s set the context for the 2022 downturn.

Dow Jones Industrial Average

This year’s decline is a process. At the start of the year, the gap between prices and the 200-month moving average was the widest on record (MMA; MMA). see chart)

Dow monthly chart

Charts created with TradingView.

Long-term moving averages often act as a vehicle for broader trends. Price often involves a pullback from an overbought or oversold condition. Especially when the amplification driver is more than some change / reversal. With the distance between the 200-MMA and the index, the dot com is falling The Great Financial Crisis (GFC) and the Covid-19 sell-off were preceded by overbought conditions.

This does not mean that the indicator has to return to 200-MMA – it could go sideways while 200-MMA is holding up. In a way, the MACD indicator can serve as a guide to extend the early trend of the year Although optimism/pessimism can be difficult to quantify quantitatively as it is a limitless indicator. (See chart above)

S&P 500 index

For the S&P 500 on potential downside 200-week moving average (WMA is now around 3,585) tends to provide a relatively strong initial cushion. There was high support in the pre-COVID period at 3,394 given the rapid slope of the 200-WMA, the probability that the index holds 3,394-.3,585 The area and the rebound from that area is high.

Monthly S&P 500 chart

Charts created with TradingView.

That’s because in the past, the slopes and 200-WMA averages have provided guidance in the event of a long decline. The indicator tends to rebound from being close to the moving average and when it rises. However, an uptrend reversal is usually preceded by a break below the 200-WMA smoothing moving average (red annotation of the chart). The smoothness of the long-term average can be interpreted as trend ‘fatigue’

Nasdaq Composite Index

To understand the progress of the current decline, the Relative Strength Index (RSI) can be used as a guide. Based on the two previous uses, the dot com and the GFC episode, they are similar to the 2022 downturn in terms of timing. The probability is high that the US index is in an advanced stage of decline (see chart) The index rebounded when the 14-month RSI was close to 30. The RSI is currently around. 42.

Although the index rebounded But it is still too early to generalize ‘trend’ conditions such as 2020-2021, as the Positive and Negative Directional Movement Index (DMI) on both monthly charts is below 25, which indicates range boundary conditions. Down a bit because Minus DMI is higher Plus DMI.

Nasdaq Monthly Composite Chart

The chart created with TradingView