I can’t believe it either, but it’s true. The end of the first quarter of 2023 is already here. As I pointed out a few days ago, the beginning of a bull market cycle often starts with Financials and Technology. Many predicted the Financial sector was the one to watch in the first quarter – and it was, but for the wrong reasons.

Some regional banks imploded over the last few weeks, and have a heavy sell-off. Financials are slowly climbing out of the hole and heading higher. While the last 5 days have provided positive returns, the sector still isn’t near the top of the leaderboard.

That may change soon as the banking sector stabilizes and again finds its footing.  The S&P Regional Banks ETF (KRE) is showing some consolidation after the recent collapse.

Similar patterns are forming in larger investment banks, like Charles Schwab (SCHW).

So what about next quarter? What can we expect? Most are predicting the recession to become more visible, although the job market hasn’t shown signs of slowing down – outside of the tech world.

The housing market is predicted to decline. Talk to our members in the Las Vegas area and ask them if new home construction is slowing. That hasn’t happened yet, but maybe it will next quarter.

As far as where the market might go, let’s look at the S&P 500 (SPY) on a monthly chart, with a 20-month exponential moving average.

Going back to 2016, the market has remained above the 20-month moving average most of the time and you have to go to the bear market in 2008 to see it stay below that average for months at a time.

Now let’s zoom in so you can see the last few months a little more closely. Since the beginning of the bear market of 2022, this would be the fourth time the market has closed above the crucial moving average. And during the 2nd and 3rd cross above the moving average, the market immediately retreated the following month – there was no follow-through. Looking at the chart below, you can see that we’ve been in a tight trading range from about 380 to 410 for the last 5 months. If we get another month to close above the moving average – we could see the market finally head higher.

If you go back to the 2001 dot com bubble or the 2008 financial crisis, you’d see the monthly chart sink lower than that 20-month moving average and the market stayed lower for months. This time is different with us holding onto the moving average and unable to make a decision.

I think that’s what has made trading this last year so tricky. The previous bear markets (including the covid crash) happened quickly and there was no question about which way the market was going. Here are monthly charts of the SPY during the 2001 bear market as well as 2008.

See how those were more pronounced downward moves?

Scroll back up and look at our current market. We’re now trading at the same level we did back in May of last year, and while the intra-day or intra-week moves have been significant, the overall move has been in a tight trading range for 11 months.

We need SPY to trade higher than 407 and then 423 to keep this trend going. I could see that happening during the second quarter.

The moves need to happen quickly, otherwise, the chart breaks down from here. It just depends on the inflation readings and if we see another crisis rise up in the second quarter.

Here’s the last trade idea for the first quarter of 2023. Let’s look at Micron (MU).

Here’s the weekly chart. Normally we look for stocks trading above their 9-period exponential moving average (wavy teal line) for bullish plays. MU traded above that line last week and looks to close higher this week as well. However, this will be the fourth time it’s come close to $65 and retreated. Despite a bullish indicator, this stock continues to move sideways.

Zooming in, here’s the daily chart:

This is a very aggressive trade idea, but I’m looking at the 21-APR 65/70 call spread that is trading for 1.07 at the time of this writing. It’s aggressive because selling the 65 call is selling an option at a 0.39 delta and I normally like to give my trades more room, but this is one of those trades where I’m trying to anticipate price action and I am willing to accept the risk of the trade. I’m being very directional and as such, am also willing to exit the trade quickly if needed.

So, why do this trade if it doesn’t fit my normal parameters? Well, this is for educational purposes and I want to show how you can look at a higher time frame’s support and resistance lines and anticipate your trades for potential better entries. Of course, it’s only a better entry if it works. 🙂

Enjoy your weekend and I’ll be right back here next week!

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