The historic importance of the current momentum in the major U.S. indices cannot be understated. The best economists, analysts and experts are battling over the question: has the bear market that lasted almost the entire year 2022 come to an end, or is the decline only at the beginning of the road, and we are on the verge of one of the largest collapses in history?

The moment is so ambiguous that in the expert community, as they say, “who goes to the woods, who goes to the woods”. Moreover, several scenarios are being considered at once: those who are in favor of continuing the “banquet” and falling to a new bottom, those who are in favor of a final reversal and the S&P 500 hiking to new highs, those who are in favor of a higher rebound to the level of plus or minus 4300 and then continuing the fall. Not to mention that everyone’s goals are different.

I conducted my own research, thoroughly studying several dozens of different macroeconomic and technical indicators for major indices, sectors, large stocks and other instruments, and came to very interesting conclusions, which I will try to detail in this article.

For the last 2 years I have been working on creating an analytical forecasting model that determines medium-term reversal levels for key US indices and stocks. This model is based on a comprehensive comparative analysis and identification of patterns in a large number of indicators and technical indicators showing overbought/oversold zones, as well as correlations, forward and backward correlations, convergences and divergences between different charts over a large historical interval.

Wave analysis (Elliott and Wolf waves), Fibonacci levels and trading indicators (RSI, MACD, moving averages, Bollinger Bands, McClellan and others), technical patterns, channels, price levels, volumes and other tools are used to confirm trend changes.

Thanks to this model, I was able to identify unique relationships and patterns that show a high probability of identifying potential trend reversal levels, and I was able to calculate quite accurately all the major reversal levels in the current bearish cycle, as well as make a good profit on it.

It is not possible to fully disclose all the analytics, as even a very prepared reader would need many days to analyze and comprehend them. Therefore, I will try to summarize the main conclusions and demonstrate some key patterns in order to try to predict what awaits the U.S. stock market in the near future.

So, I will not emphasize macroeconomics for a long time, I will only note the main factors that have and will continue to influence the markets.

It is already obvious to everyone that the cycle of tightening monetary policy and high interest rates will inevitably lead the economy to recession. Actually, it is not surprising: the economy is cyclical, and a cycle of growth is always followed by a cycle of decline. It is like a law of nature or physics.

A number of leading macroeconomic indicators such as yield curve inversion, inflation (PPI, CPI, PCE), business activity index (PMI), consumer confidence index (CCI), University of Michigan consumer sentiment index (MCSI), retail sales and other indicators have been signaling an impending recession for a long time. Although technically a recession had already occurred in the middle of last year when the US GDP showed a decline for 2 consecutive quarters.

Quite naturally, although late, to fight high inflation, the Fed turned off the “printing press” and switched to the policy of tightening, the so-called QT (quantitative tightening), expressed in raising the key rate and withdrawing liquidity from the market.

Obviously, to fight inflation it is necessary to significantly suppress the level of consumption, which will inevitably trigger a recession. And this is a vital process for the economy, which allows to clear the ballast in the form of non-viable zombie companies and reboot the economic system to restart a healthy growth cycle.

So, to summarize, we are in for a recession, and the only question is how severe and whether it will lead to a prolonged global crisis or depression.

For the purposes of our study, it is important to know that historically the main fall in the market occurs at the time of a rate cut, and during the so-called Fed Pause (when the Fed pauses raising the rate and leaves it high for a while to see if there is a long-term effect on inflation), on the contrary, the market rises. Only this rise is only a mental bearish rally, not a trend change.

If we proceed from the understanding that the Fed will hold off on further rate hikes in the very near future, then the market expects a significant rally for a few months, followed by a massive collapse by this logic.

Now let’s try to technically understand what is happening and what we can expect in the next few months.

Since the beginning of the correction, the decline in the major U.S. indices has been in the form of an expanding diagonal, and most analysts were inclined to believe that within this diagonal there would be a plunge to the 3000-3400 area. In light of the latest rise in the indices, the diagonal scenario has been called into question.

For example, Dow Jones broke the diagonal back in November last year, having recovered 75% of the entire correction in just 2 months. At the end of January, we witnessed the price going beyond the MA200 (200-day moving average) on the daily TF (timeframe) and the breaking of the diagonal on the S&P 500, which also questioned the continuation of the bearish scenario. Moreover, a golden cross is about to form on the chart when the MA50 (50-day moving average) crosses the MA200 from bottom to top on the daily TF.

Historically, over the entire period of the chart’s existence, this has always meant a change of trend, and the index went to conquer new peaks. In any case, this applies to all bear markets, and even almost all intra-cyclical corrections obeyed this rule. Also, on the weekly TF the price broke the MA50 and is making an attempt to consolidate above it.

But let’s not get overexcited ahead of time. Since we proceed from the base case scenario, in which we are starting to fall into recession, and a change of Fed rhetoric is not far off, we need to consider many other equally important patterns to build the most probable scenario.

Let’s start by analyzing the interaction between price and moving averages. I will stipulate that I view this correction as a full-blown bear market, not an intra-cyclical correction that at least corrects the entire super bullish cycle since 2009.

I came to this conclusion by examining many factors, both macroeconomic and technical. This is a separate big topic, so I will not describe it in detail here.

On the weekly TF in all bear markets, after going below MA50, the price goes to test MA200 and then, as a rule, comes back to test MA50 from below before continuing to fall. Now the price made a retest of MA50 and pierced it.

A similar technical picture was in October 1973, when the price tried to break MA50 on the weekly TF for a month, and on the daily TF it confidently went above MA200, having made a retest from above and seemed to go higher. And there on the daily TF MA50 almost crossed MA200, forming a golden cross.

What happened then is well known to everyone: the index went into a peak and lost another 45% during the year (see the chart below on the left).

A similar situation was also during the dot-com crash in 2002, when the price broke through MA200 twice, and also almost formed a golden cross, which did not prevent the index from collapsing by another 34% afterwards (chart below on the right).

Graph 1

An even more curious similarity to the current moment was seen in 2008. The charts below show 2 bear markets: 2008 and now. From top to bottom the following indicators on the weekly TF: RSI, S&P 500 index (on the chart the black curve is MA200, blue curve is MA50), stocks above 200MA, stocks above 50MA, MACD.

Look at and carefully compare the 2 slides. You can clearly see how the price on both charts bounced to MA50 after testing MA200. At the same time it is around 50 on RSI and MACD is still in the negative zone. There is a similar pattern and momentum on MACD and RSI with a pronounced divergence.

What happened next in 2008 is also perfectly visible – the index collapsed by 53% in less than 10 months. And notice how bear markets end – the right half of the slide with the 2008 recession. After the death cross formation on the weekly TF, the RSI and MACD reach extrema on the weekly TF and there is a strong divergence on them and stocks above the 50MA and 200MA.

Chart 2

A possible schematic scenario in case of the bear market continuation is illustrated on the right side of the slide.

On the weekly TF, in the previous bearish cycles, the price never consolidated above the MA50 and went beyond it when the decline ended and the trend changed to a bullish one. I projected MA50 and MA200 in case of bear market continuation, made calculations on possible levels of price movement, applying Elliott waves, Fibonacci and horizontal levels, so that the price did not go beyond MA50 and the scenario you see was obtained.

Of course, the angle of the MA50 may be slightly corrected, but globally it will not change the picture much. If this scenario works, then after a hike to the 3000-3400 area, a rebound not higher than 3800-4000 will follow, then a further fall through a delay at about 2750 with a possible final bottom in the 2000-2400 area.

The VIX (Volatility and Fear Index) and its inverse correlation with indices deserves special attention. I analyzed the history of this correlation over the past 20 years and found a surprisingly accurate pattern, which is even visually clear in the chart below.

Chart 3

Every time a stock above the 50MA (S5FI, orange curve) reaches extremes, the VIX puts in a bottom. This also coincides with the bottom on the RSI and MACD. When the VIX bottoms, it tests the MA50 from below (blue curve on the chart), then pulls back a bit, forming a divergence with stocks above the 50MA, and “shoots” up 70-100% or more, all within a matter of days.

A bullish divergence forms on the RSI and MACD before the “takeoff”. I have double-checked this pattern over the whole historical period since 2007. – It works like clockwork.

In addition, we are now witnessing an even more unique moment on the VIX, almost two drops of water similar to the moment in the run-up to the 2008 collapse (see chart below).

Shortly before the biggest fall of 2008, there was a very similar sideways pattern with almost identical tops and bottoms and rising bottoms on the trendline, which was broken down, then tested from below, followed by a pullback and a “to the moon” flight. There was a remarkably similar divergence in RSI, MACD and the stock above the 50MA.

From what follows the conclusion that there is a high probability of a significant rise of VIX in the near future. And this always happens when indices accelerate their fall and rush to a new bottom.

Chart 4

There are also a number of bearish indicators at extremes, such as Fear & Greed Index, Intermediate Term Optimism Index (Optix), S5TW (stocks above 20MA), divergence on McClellan Oscillator and MACD, divergence between smart money & dumb money (smart money / dumb money: smart money is not buying but selling) and others.

To summarize, I believe that the bear market is far from over and we will soon see another wave of decline. Short-term, this does not exclude the possibility for the indices to go even higher. But it is unlikely to go much higher.

Today we will see what Powell will say and what rate decision is made. If they suddenly raise the rate by 0.5% or 0.25%, but keeping the tough rhetoric, we may well see a hearty sell-off. And mammoth reports (Meta (NASDAQ:META; recognized as an extremist organization in Russia and banned), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL)) may also offer surprises this week.