(Premium) February Technical Market Outlook and Equity Playbook

Stocks got off to one of their best starts ever in January. With every passing day, the climb looks less like a bear market rally and more like the start of a new bullish era. We aren’t out of the woods yet, but we think we see the light at the edge of the forest.

US Equities

We start our monthly technical outlooks at the top for a reason. In just a handful of charts, we can see exactly the type of investment environment we’re in. Are stock prices rising or are they falling? Should we be erring on the side of buying or selling stocks?

Last month, we had this to say about the world’s most important stock index:

The S&P 500, a market cap-weighted index comprised of 500 of the biggest companies in the United States, is stuck below a falling 200-day moving average. At best, prices are stuck in a sideways trend. The line in the sand for the SPX is 4100. That’s the 161.8% Fibonacci retracement from the entire COVID selloff, and that’s been overhead resistance since May. If we’re above that, we’ll be looking for stocks to buy. As long as we’re below it, we need to err towards caution.

Since then, the index has surpassed its 200-day. That’s one point for the bulls. But we haven’t surpassed the resistance area near 4100. The bears have the upper hand unless and until that level is taken out.

(Editor’s note: If you’re having trouble seeing any chart in this report, click on it to view a larger version)

We’re watching closely, because a few more days like the last would quickly push us above it and give us confidence to flip from a neutral stance to one that’s more bullish overall. Remember, our goal is not to nail tops or bottoms, but to catch the middles of big trends. IF this is truly the start of a new, multi-year bull market, we can afford to wait for that confirmation.

It’s the exact same situation for the Dow and the Nasdaq. The Dow Jones Industrial Average has so far been unable to absorb all this overhead supply between 34000 and 35000. It wouldn’t take much to get a breakout, but this editor is from Missouri. It’s gotta show me.

The level for the NASDAQ is 12000. That’s the 161.8% retracement from the 2020 selloff and the September 2020 peak, which marked the beginning of a regime shift as value stocks took the lead from growth. If the NASDAQ is above 12000, we can confidently be buying stocks.

Small Caps are the ones to watch. With the last few days of gains, the Russell 2000 is above its own key area of resistance. That’s a good sign – small caps were the first to find a bottom last year and could very well lead us higher in 2023. But if IWM is back below 190, expect the rest of the major US indexes to be failing, too.

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