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3-month Head and Shoulders Top Continues?

Stocks finished lower Tuesday after APPL unveiled its new iPhone 15 at its annual marketing event. Tomorrow, investors will focus on the release of the Consumer Price Index (CPI) for August. PPI number comes out the next day.

CPI remains the most important economic number for the month as the next FOMC meeting is one week away. If August CPI data does not decline, investors may price in a more hawkish Fed, increasing market volatility. The outcome of this report can move markets sharply in either direction depending on whether inflation continues to decline or rebounds.

Most of the S&P 500 Index’s 11 sectors closed down for the day, with S&P Technology (XLK) the biggest loser, down 1.81%. Communication Services (XLC) and Consumer Discretionary (XLY) also fell, losing 1.04% and 0.91%, respectively. The winners for today appear within the value sectors, including Energy (XLE +2.36%), Financial (XLF +0.67%), and Utilities (XLU +0.13%).

SPX remained range-bounded over the past 70 trading days. Is the tide turning, or is this another countertrend rally before the next down leg?

On a positive note, SPX continues to trade comfortably above its rising 200-day ma (4,175.07) and retains a higher low pattern (4,335.31 – 8/18/23, 4,335.31 – 8/18/23, and 4,356.29 – 8/25/23) and Jul 2023 downtrend breakout (currently at 4,369). The ability to maintain above neckline support at 4,328-4,335 (6/26 and 8/18/23 lows) hints at a potential SPX bottom.

On a negative note, five negative outside days (7/27, 8/4, 8/10, 8/24, and 9/1/23) and two gap-downs (8/23/23 at 4,550.93-4,567.53 and 9/6/23 at 4,490/35-4,496.01) warn of further SPX selling. Also, the negative outside day highs on 8/10/23 (4,527.37) and 8/4/23 (4,540.53) act as formidable resistance. The failure to trade convincingly above the 61.8-78.6% retracements (4,503.26-4,548.91) from 7/27/23 to 8/18/23 decline also warns of pivotal resistances.

SPX nears a short-term inflection as it challenges the 50-day ma (4,480.34) and the right shoulders (4,491 – 9/1/23 and 4,541 – 9/11/23). Failure to clear these critical resistances solidifies the 3-month head and shoulders top pattern. The spread (305.27) remains wide. A contraction helps to alleviate an overbought condition and allows for the next sustainable rally.

A convincing surge above 4,541.25-4,567.53, corresponding to the 61.8-78.6% retracements and 8/2/23 gap-down, reaffirms the 8/18/23 low as a pivotal bottom and allows for a retest of 4,607.07 (7/27/23 reaction high and the negative-outside day high). Above 4,607.07 signals the resumption of the October 2022 primary uptrend, with the potential to retest the Jan 2022 all-time high (4,818.62) and above 4,886 (head/shoulder top breakout above 4,607.07 projection).

On the downside, violation of initial support at 4,430.46 (9/7/23 low) and 4,369 (the extension of the Jul 2023 downtrend breakout) coupled with breakdown below neckline at 4,328.08-4,335.31 (6/26 and 8/18/23 lows) and 4,302.15 (the 38.2% retracement from the 3/13 to 7/27/23 rally) confirms a head/shoulders top and warns of a decline toward 4,049-4,208 (May 2023 breakout, 50-61.8% retracement from Mar-Jul 2023 rally, and the head/shoulders top breakdown target).

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