Last Friday, the major index formed a "bearish engulfing week" pattern, and historical data indicates a high probability of weakness in the next two weeks.

Written by: Li Jia

Source: Wall Street Journal

The US stock market recorded a slight rebound on Monday, but several institutions known for technical analysis questioned the sustainability of this rebound, warning that the market may face a weak and volatile summer trend.

Mark Newton, Head of Technical Strategy at the independent US market research and consulting firm Fundstrat, stated in a report after Monday's market close that the day's rise resembled more of a "dead cat bounce," rather than a confirmation of a trend bottom. He cited the S&P 500 cycle composite indicator, which shows that the market is approaching a phase peak and is expected to remain weak at least until late July, with downward risks possibly extending into October.

From specific data, the Nasdaq Composite Index rose 0.9% on Monday, while the S&P 500 Index increased slightly by 0.3%, but compared to the declines of 4.2% and 2.6% on the previous Friday, the rebound was clearly insufficient.

Newton pointed out that the S&P 500 Index at one point rose about 1% during Monday's trading but subsequently gave back those gains, closing below the opening price. Even more concerning is that the number of declining stocks exceeded that of advancing stocks, indicating a negative market breadth, with trading volume also far below the levels during last Friday’s sell-off. He stated:

"Whether it's the S&P 500 or the Nasdaq 100 Index ETF (QQQ), both closed below the opening price. This closing pattern suggests a high likelihood that the market will test and break below last Friday's low."

Cycle Model Peaks, Expect Weak Volatility in Summer

The S&P 500 cycle composite indicator that Newton relies on integrates historical seasonal patterns with calendar trends into a single predictive path for the market. He pointed out that this model has issued a peak signal near the current level and has turned negative.

Newton admitted that this cycle model is not infallible, as it indicates the timing and direction of a turn, rather than the magnitude of the adjustment. However, he emphasized that the broad index cycle has weakened from the predicted high, combined with last Friday's massive liquidation of growth stocks and the market positions still in a stretched state, these factors collectively form strong evidence supporting a weak volatility trend during the summer.

Regarding the level, Newton expects the S&P 500 may retest the 7333 point of mid-May in the short term, and if the decline expands, it may further explore the range of 7135 to 7250 points.

Citi's Technical Signals Echo Bearish Assessment

Coincidentally, Citi's technical analyst team also issued a similar warning. The report led by Daniel Tobon pointed out that the Nasdaq 100 Index, Philadelphia Semiconductor Index, and S&P 500 Index all formed a "bearish engulfing week" pattern last Friday (where the week's range fully covers the previous week's range and closes lower, indicating increased selling pressure).

Citi stated that historical data shows when both the Nasdaq 100 and S&P 500 trigger this pattern simultaneously, there is a high probability of market weakness in the following two weeks. Although the specific declines may vary, the overall downward trend is relatively clear.