Is it the end of the bear-market rally on the S&P 500?

Volatility was high during the Asian and US session yesterday, which saw a reversal of fortunes for the Japanese yen and the US dollar track Wall Street lower by the close on concerns the US is already in a recession.

The yen originally weakened and sent USD/JPY over 250 pips higher as the BOJ did absolutely nothing, catching pre-emptive hawkish bets off guard. Yes with US retail sales sinking to a 12-month low at -1.1% m/m, then industrial production and manufacturing output falling –0.7% m/m and -1.3% respectively, it seems ‘happy new year’ is a distant memory and bears are coming out of hibernation.

The Dow Jones led Wall Street lower (-1.8%) followed by the S&P 500 (-1.56%) and the Nasdaq (-1.3%). It also dragged the dollar lower as traders bet on a lower terminal Fed rate, seeing USD/JPY hand back most of its earlier gains. AUD, CAD and oil were also dragged lower as recession concerns dominated sentiment.

S&P 500 daily chart:

The S&P has stalled at an interesting juncture, and one that may prove to be a major swing high, during its worst session in 21. A large bearish ingulfing candle formed following an intraday false break of 4,000, trend resistance and the 200-day MA. Also note how the S&P has struggled previously at the 50-day MA back in August and twice in December. Volume was also above average to show conviction in the down-day, and the OBV (on balance volume) has been trending lower since November, despite the S&P’s rally since October, to show that bearish volume is dominating overall.

Have we just seen the end of a bear-market rally?

Possibly, perhaps not. But it does appear that a prominent swing high has formed

• Our bias remains bearish below 4016 with an initial target at 3800
• Bears could either enter a break of yesterday’s low, or seek to fade into rallies with yesterday’s bearish candle (this potentially increases the reward to risk ratio)
• If confident this is the end of a bear-market rally, bears could keep an open downside target and manage with a wider stop as it moves lower to managed the inevitable whipsaws along the way

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