Every so often something rare happens on equity indices, and I get to run the numbers to see what to expect when that happens, which is something I always enjoy doing. Last week there were touches and punches below the weekly 3sd lower band on the US equity indices, so I’ve been looking back to see what has happened in the past when this happened.
On the bigger picture the topping patterns on the US equity indices that I was looking at in my post on Wednesday 19th Feb have all broken down and none have yet made target, though SPX and QQQ are getting close. I’m expecting to the US indices go lower, but there is a decent case for a rally during the next couple of weeks before we reach Trump’s key date on April 2nd when he has said that his full threatened tariffs on the rest of the US trading partners are going on.
We saw a very near miss of the weekly 3sd lower band on IWM last week, full hits on QQQ and DIA and and an intraweek punch below on SPX. So what does this tell us to expect here? Well the takeaways are as follows:
The only two previous punches below were in:
the 2020 crash, which continued down for a further two weeks and 11% before making a major low.
Feb ‘22 and delivered a 10% rally over the next couple of weeks before declining again.
The other four touches or near misses of the weekly 3sd lower band delivered the following:
Dec ‘19 - Serious low lasting 14 months and rising about 50%
May ‘22 - Two week rally rising about 7%
June ‘22 - Ten week rally rising about 18%
Oct ‘23 - Serious low lasting 16 months and rising about 50%
I’m doubtful about a serious low here for many reasons, and I’m also doubtful that we are watching a full crash play out here at speed, though that could be the case. What I think is more likely is that we see an oversold rally here, that should historically last at least a week and deliver a rise of at least 7%. With last week’s low at 5504 then that would give a minimum target in the 5890 area.
SPX weekly chart:
Another thing I look for at lows is a decent pattern structure, and that also came into focus last week with a decent quality falling megaphone on SPX from the highs. In the short term a small double bottom has broken up with a target in the 5760-80 range, with falling megaphone resistance currently in the 5735 area.
On the bigger picture a daily RSI 5 buy signal fixed at the close on Friday, daily middle band resistance is currently at 5835, and weekly middle band resistance is currently at 5950.
SPX 15min chart:
I was watching the high quality falling megaphone from the highs for much of last week on QQQ. In the short term that falling megaphone has broken up and small double bottom has broken up with a target in the 495 area.
On the bigger picture a daily RSI 5 buy signal fixed a few days ago and reconfirmed at the close on Friday, daily middle band resistance is currently at 504, and I have NDX weekly middle band resistance currently at 21114.
QQQ 15min chart:
A decent quality falling wedge has formed and broken up on DIA. No obvious reversal pattern has broken up yet but a IHS right shoulder may well be forming at the moment. If that forms and breaks up, the target would be in the 434 area.
On the bigger picture a daily RSI 5 buy signal fixed a few days ago, but then failed so there is no current daily buy signal on DIA. Daily middle band resistance is currently at 430, and I have INDU weekly middle band resistance currently at 43516.
DIA 15min chart:
A decent quality falling wedge has formed and broken up on IWM. In the short term that falling wedge has broken up and a small double bottom has broken up with a target in the 209 - 210.5 area.
On the bigger picture a daily RSI 5 buy signal fixed at the close on Friday, daily middle band resistance is currently at 210.70, and I have weekly middle band resistance currently at 224.
IWM 15min chart:
There is a clear two week window here into the next big tariff date on April 2nd and I’m thinking this is a nice setup for a decent rally. I’ll be watching for possible bear flags to form on US indices to set up the next leg down that will likely follow.
As I have been since the start of 2025 I’m still leaning on the bigger picture towards a weak first half of 2025 and new all time highs later in the year, very possibly as a topping process for a much more significant high. One way or another I think we’ll be seeing lower soon and I’m not expecting this to be a good year for US equities, not least because both of the last two years have been banner years for US equities. A third straight year of these kinds of gains looks like a big stretch. I could of course however be mistaken. UPDATE 11th March 2025 - I am wondering if this may be a bear market that dominates the whole of 2025.
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