From the pandemic low of 2,191.86 (3/23/20), SPX rallied 119.84%, recording an all-time high of 4,818.62 (1/4/22). Since the peak, SPX has reversed direction and trended lower, evidenced by either a 1-year downtrend trend channel or a falling wedge pattern.
The question is whether the January 2022 decline is a deep and long correction within an ongoing structural uptrend or the start of a structural bear decline.
A correction within a structural bull trend differs from a structural bear trend.
One of the keys to deciding is the magnitude or severity of the sell-off and the quality of the ensuing rebound or the technical setup (bullish, neutral, or bearish).
A falling wedge is typical during corrective phases, including deep declines. However, the magnitude/severity of the correction remains the decisive factor in determining the type of decline.
A shallow correction will often find pivotal support near the 38.2% Fibonacci retracement (3,815) from the low (2,191.86 – 3/23/20) to the high (4,818.62 – 1/4/22). A successful test hints at the continuation of the uptrend. However, violation of support at 3,815 or the 38.2% retracement during Jun 2022 and Oct 2022 warns of a severe correction.
Despite violating the 38.2% retracement, a falling wedge can still be a correction within a structural bull trend. The caveat is the decline must not surpass the 50%-61.8% retracement (3,505/3,195).
Is 3,491.58 or the 10/13/22 low a solid bottom?
It is encouraging SPX found support in the mid-3,000s, rebounding from the 50% retracement (3,505) from Jan-Oct 2022 decline. It is also promising a bullish technical setup has developed in the past few months via a falling wedge pattern.
Nonetheless, the primary 1-year downtrend channel remains, and as such, any rally is an oversold rally until proven otherwise.
Above the top of the wedge (4,002) and the top of the Jan 2022 downtrend channel (4,042) hints at a trend reversal. A higher high pattern above the Dec 2022 highs (4,100-4,101) reaffirms the trend reversal, allowing for a rally toward the Aug 2022 reaction high (4,325).
The contraction of the 50-day ma (3,932.81) and the 200-day ma (3,966.35) warns of an impending inflection.
A golden cross buy signal further substantiates the next sustainable SPX rally.
Failure of the 50-day ma to successfully clear the 200-day ma coupled with a breakdown below 3,764.5 (Dec 2022 low) warn of a retest of 3,491.58 (10/13/22 reaction low), 3,372 (bottom of the wedge pattern), and 3,393.5 (Aug 2020 V-pattern breakout).
The 61.8% retracement (3,195) from the Mar 2020-Jan 2022 rally and the bottom of the downtrend (3,251 and 3,172) remains pivotal longer-term support.
Will a decisive breakdown below this critical support confirm a structural bear/trading range trend?