Oct 1, 2022
VOT Research Desk
Key Insights and Analysis
A crucial test is coming up for the four-step bottoming process for the stock market.
The third step required for markets to begin a new uptrend is a retest of the mid-June low.
The retest has not yet failed, but the last week’s persistent selling pressure suggests it is a distinct possibility
Ned Davis Research stated in a note to clients on Wednesday that the S&P 500 is retesting support at its mid-June low, putting a critical test on the four-step bottoming process for the stock market.
Whether stocks are positioned for further declines or the beginning of a new uptrend will be determined by how the market responds to retesting those lows. However, NDR stated that the initial results “are not good for the bulls” as of now.
Market bottoming takes place in four stages: an oversold reading, a rally, a retest, and breadth thrusts.
Eventually, the market launches a rally once it reaches deeply oversold levels. Retests of the lows follow the majority of rallies. Breadth thrusts occur after successful retests, indicating that the downtrend has changed into an uptrend.”The procedure is reset to step 1 if retests fail,” NDR explained.
There were a few breadth thrusts in the stock price rally from June to August, but those eventually failed as the market fell. A second test is now likely.
On June 17, the S&P 500 recorded a low of 3,636.As of Thursday afternoon, the popular index was trading at 3,638.”NDR stated that although the retest has not yet failed, the ongoing selling pressure over the past week suggests that it is a distinct possibility.
A decisive close below that mid-June low suggests that the downtrend will continue until the market reaches extremely oversold levels. At that point, the four-step process would begin all over again, with a subsequent rally, retest, and breadth thrusts.
Additionally, a decisive failure to retest the June lows must be confirmed by multiple daily or weekly closes below that level, as a quick break below the lows may indicate final surrender and prompt a swift rally.
When investor sentiment is at or close to rock bottom, as it is right now, that can be especially true.
However, the stock market’s ability to stage a turnaround and establish a new uptrend would have made significant progress if the retest held because breadth thrusts, which measure broad upside participation in stocks, would be the only components remaining in the four-step bottoming process.
The bottoming procedure would be restarted at step 1 with additional breadth failures. On the other hand, “NDR summarized that a strong rally with short-term breadth thrusts and intermediate-term confirmation would support the case for a new uptrend.
NDR added that a stock market rally by the end of the year is still possible regardless of whether the mid-June lows serve as support. However, any year-end rally should be considered a bear market rally unless proven otherwise if the retest fails and stocks fall..
