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A Market Bottom or Another Oversold Rally?

Concerns about the Fed tightening process, economic slowdown, and Covid outbreaks in major Chinese cities led to a sharp sell-off earlier today. However, stocks soon generated bounces into the market close after recovering from early-morning losses.


The S&P 500 Index (SPX) rallied 24.34 points to end the day with modest gains of 0.57%. The Dow Jones Industrial Average (INDU) also recovered from a nearly 500-points decline earlier in the day to close with gains of 238.06 points or +0.70%. The Nasdaq Composite Index (COMPQ) and Nasdaq 100 Index (NDX) led the marketplace with returns of 1.29% and 1.32%, respectively.


Is this finally a market bottom or another oversold technical bounce?


The week will remain volatile as 160 companies in the SPX Index will report this week. Investors will focus on these corporate earnings releases, including the mega-tech stocks such as AMZN, AAPL, GOOGL, FB, and MSFT. Bottom-up investors will scrutinize the earnings reports for clues to confirm or reject if earnings are slowing and the global economy is slipping into a recession.


Key stock market indexes and many stocks fell into bear market territories late last week before rebounding today. Dow Industrials suffered one of its worst one-day performances since 2020 last Friday, falling for four straight weeks. The SPX Index and Nasdaq Composite also declined for three consecutive weeks.


Market indexes appear to have traded down to oversold levels for the third time this year, coming close to the 1/24/22 lows (SPX – 4,222,62) and 2/24/22 lows (SPX – 4,114.65). Maintaining above the Jan, Feb, and Mar 2022 lows prevented deeper selling and prompted another technical rally.


The geopolitical backdrop remains challenging. Macro-economic conditions are weakening. Fed monetary policies and the potential for a Fed policy mistake continue to worry investors. Market internals remains soft. Sector rotations favor defensive areas and low-beta stocks over cyclical areas. USD has surged sharply higher on the backdrop of flight to safety. Interest rates continue to climb to four-year highs to retest the 2018 peak yields.


The above conditions do not bode well for a sustainable and longer-lasting recovery. In previous blogs and technical reports, we mentioned time is required to confirm or reject the toping patterns currently developing in popular market indexes. Although oversold conditions and the ability to maintain above crucial supports can lead to technical rallies, the key to market bottoms and longer-lasting recoveries is how markets react at critical resistances.


Below are charts of popular market indexes, including SPX, INDU, NYA, COMPQ, NDX, MID, and SML. We recommend investors and traders closely monitor the overhead resistance levels to determine if this is another oversold rally or the start of a sustainable recovery.



Source: Chart courtesy of StockCharts.com

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