SPX Index has fallen 833.70 points or -19.28% from the 8/16/22 high (4,325.28) to the 10/13/22 low (3,491.58). The large-cap index has lost 1,327.04 points or -27.54% from its 1/4/22 all-time high of 4,818.62 to the 10/13/22 low. The two setbacks place SPX and many stock market indexes firmly entrenched in bear market territories.
So, is the mid-Oct bottom a capitulation low and the start of sustainable SPX recovery, or another oversold rally?
As many investors ponder the question, there are some positive but mostly negative technical developments this year.
There have been two oversold rallies of over 10% this year, including the 12.70% 2/24 to 3/29/22 rally and the 18.93% 6/17 to 8/16/22 rally. Three bear declines of over 10% occurred, including the 14.61% 1/4 to 2/24/22 decline, the 21.57% 3/29 to 6/17/22 decline, and the recent 19.28% 8/16 to 10/13/22 decline, reinforcing the primary downtrend.
A recent rebound from the 10/13/22 low of 3,491.58 or 8.76% appears to be the third oversold rally this year.
If the bounce continues, how high can SPX rally to before fading? What are the downside risks?
Another daily reversal pattern (outside day) developed on 10/21/22 is constructive. Interestingly, the first occurred on 10/13/22, coinciding with the reaction low. The two developments hint at the continuation of the 10/13/22 oversold rally. A higher-low pattern, corresponding to 3,491.58 (10/13/22 low) and 3,647.42 (10/21/22 low), indicates the potential for a near-term bottom. Also, SPX appears to have climbed above its Aug 2022 downtrend at 3,786, signaling the continuation of the oversold rally.
Several SPX daily technical indicators, namely the MACD and RSI, are also rebounding from their late-Sept 2022 lows, suggesting momentum may be building to extend the third oversold rally.
Nonetheless, the primary downtrend from Jan 2022 all-time high remains down. Two key moving averages (i.e., 50-day and 200-day) are also trending down at 3,877.25 and 4,1130.22, creating significant overhead resistances on rallies.
To confirm a near-term bottom and extend the 10/13/22 oversold rally, SPX must clear the 10/5/22 intra-day high of 3,806.91, which corresponds closely to the 38.2% retracement (3,810) from Aug to Oct 2022 decline as well as neckline resistance to a potential 1-month head and shoulders bottom formation.
A breakout above 3,810 extends the rally toward pivotal secondary resistance at 3,887-3,908.5, corresponding to the 50-day ma (3,877.25), 9/6/22 low (3,886.75), 9/21/22 island reversal high (3,907.07), and the 50% retracement (3,908.5) from Aug-Oct 2022 decline.
The ability to convincingly surge above 3,908.5 and 3,945.86 (6/28/22 high) can lead to the next rally to formidable intermediate-term resistance at 4,007- 4,117.5 or the 61.8% retracement (4,007), 9/13/22 gap-down (4,037-4,084), 9/12/22 high or righ shoulder (4,119.28), 1-month head/shoulders bottom breakout target (4,1222), the 200-day ma (4,130), and the 6/22/22 high or left shoulder (4,177.51).
The current 10/13/22 oversold rally remains an oversold rally within the continuing primary bear trend (since Jan 2022 all-time high), implying another decline is a distinct possibility after the end of the 10/13/22 oversold rally.
On the downside, trading support coincides with the 10/21/22 intraday low (3,647.42) and below this 3,491.58 (10/13/22 reaction low). Violation warns of the next SPX selloff toward 3,324 (bottom of the Aug 2022 declining broadening wedge), and below this to 3,176-3,195 (1-month base breakdown downside target, the bottom of the Jan 2022 downtrend channel, and 61.8% retracement from Mar 2020 to Jan 2022 rally), and 2,948.5 (6-month head/shoulders top breakdown target).