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Stocks got off to a positive start in 2023, but will the recovery last?
The stock market has been edging higher so far this month, but the S&P 500 and Nasdaq 100 indices are now facing major resistance at their long-term downtrend lines and 200-day moving averages. Understanding these key technical levels is crucial for making informed investment decisions and staying one step ahead of the stock market.
In this article, we analyze the index ETF charts for a deeper look at the current support and resistance levels of $SPY (S&P 500 ETF) and $QQQ (Nasdaq 100 ETF). As a bonus, we also highlight the stealth relative strength of $MDY (S&P Midcap 400 ETF).
By reading this post, you will gain a better understanding of the current market landscape, and be one step closer to making smart, profitable investment decisions in 2023.
So, are you ready to invest like a pro? Keep reading for the powerful, but simple analysis you need to know.
The big picture trend into 2023
After trending steadily lower throughout 2022, all the major indices formed year-long downtrend lines (from their all-time highs of Dec. 2021/Jan. 2022).
Additionally, last year’s weakness caused the main stock market indexes to fall below their 200-day moving averages—an important, powerful indicator of long-term trend which we recently wrote about.
So, the S&P 500, Nasdaq, and the other broad market indices entered 2023 below their downtrend lines and 200-day moving average—but where are they now?
Let’s take a look.
$SPY: S&P 500 ETF stalls at resistance of long-term downtrend line
After bouncing off its 2-year low in October 2022, $SPY tried to break out above its long-term downtrend line 2 months later. However, both the downtrend line and 200-day MA acted like a wall and caused the price action to reverse lower after 2 separate attempts.
This week, $SPY once again tried and failed to reclaim its 200-day MA and downtrend line—the third failed attempt in less than 2 months.
Check out our annotated daily chart of $SPY below (press chart to enlarge image):
After a 1.5% decline on January 18, $SPY has now come into support of its rising 50-day MA, with the 20-day EMA just below.
This convergence of shorter-term support could enable the S&P 500 to make another run at resistance in the coming days. Note that $SPY also formed a “higher low” with a multi-week base of consolidation in December 2022.
If current support of the 20 and 50-day moving averages fails to hold, then look for $SPY to potentially form another higher swing low above the $375 area.
A breakdown below that December 2022 low would be cause for concern, as it would invalidate the higher swing low of the current, 3-month recovery attempt.
$QQQ: Nasdaq 100 ETF ruled by relative weakness
Nasdaq 100 ETF ($QQQ) remains a laggard, as the price has not even touched its 200-day MA since March 2022. It also has remained firmly below its downtrend line the entire time:
While $SPY already tested its 200-day MA and downtrend line this week, notice that $QQQ is showing relative weakness by trading well below both major resistance levels.
The January 18 selloff caused $QQQ to finish right at key, intermediate-term support of its 50-day MA.
Although further support of the 20-day EMA is just below, that ugly red candle could potentially become a lower high (from the December 2022 peak).
If $QQQ is unable to hold above its 20-day EMA, then the Nasdaq 100 ETF could swiftly see a test of its December swing low.
If that level fails to hold, then $QQQ would form a lower high and lower low, signaling a possible resumption of the dominant downtrend.
$MDY: S&P Midcap 400 ETF leading with a glimmer of hope
Although both $SPY and $QQQ are below their downtrend lines and 200-day MAs, the S&P Midcap 400 ETF ($MDY) chart is more encouraging.
$MDY has been showing stealth relative strength by outperforming both $SPY and $QQQ since bottoming in October 2022.
$MDY is the only major index ETF currently trading above its 200-day moving average, and with all moving averages stacked to the upside ( 8ema > 20ema > 50ma > 200ma):
Although $MDY is above its 200-day MA, note that it remains below its downtrend line. Like $SPY, $MDY faced nasty price rejection after bumping into its downtrend line on January 18.
Such price action on the back of moderate relative strength could lead to sideways to lower price action in the coming week. Be on the lookout for potentially choppy and indecisive price action as well.
Ideally, we’d love to see the price pull back slightly, then chop around while holding above its rising 20 and 50-day MAs. However, a breakdown below the 200-day MA and prior swing low would be rather bearish.
Trading action plan
Although stocks have been edging higher so far this year, the January 18 selling was a step in the wrong direction for the current rally attempt. Still, it was not a final nail in the coffin.
With institutional investors tracking these same key trendlines and indicators, you should be prepared for a potential tug-of-war that could lead to volatile, indecisive price action in the near-term.
In addition to trendlines and moving averages, we will be closely monitoring how leading stocks and sectors react to weakness in the coming days. The relative performance of the leaders will lend credence to either the bull or bear case—both of which are valid at this point.
For now, our MTG swing trade portfolio remains primarily in cash. Sitting on the sidelines at these pivotal levels enables us to stay nimble and ready to respond to whatever the market delivers.
Remember to always trade what you see, not what you think!
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