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A short-term market bottom and another oversold rally?

After falling 20.93% from the Jan 2022 all-time high (4,818.62) to the recent May 2022 low (3,810.32), the S&P 500 Index is now putting in another short-term bottom. Buy-on-dips traders have returned, as evidenced by stocks rallying in four of the past five trading sessions. The rebound of 6.5% from the intraday low last Friday (5/20/22) coincided with a weaker US dollar, pullback in interest rates, less-hawkish Fed comments, earnings improvements in the retailers, and bargain hunting.


The daily hammer reversal pattern on 5/20/22 also hints at near-term selling exhaustion. However, a series of lower highs and lower lows over the past 2-months and 5-months suggest the primary trend for SPX Index remains a downtrend.


Reversing this downtrend would require heavy lifting from the bulls. The first hurdle to confirming an intermediate-term bottom is SPX to breakout above initial resistance at 4,091-4,158 (2/24 and 3/8/22 lows, 5/17/22 high, and the 38.2% retracement from 3/29-5/20/22 decline). The second challenge is to surge above secondary resistance at 4,282-4,321 (50-day ma, 5/4/22 high, 61.8% retracement from 3/29-5/20/22 decline, and the Mar/Apr 2022 downtrend). Above 4,321 signals a retest of the 200-day ma (4,458), top of Jan 2022 downtrend channel (4,515), and 3/29/22 reaction high (4,637).


Expect market volatility to expand and erratic trading to prevail into the summer as liquidity begins to dry up. Remember, the lack of market participants can lead to sharper price movements to the upside and downside. It will not take too much buying for the market to climb sharply higher. Likewise, if selling increases, it can lead to the market plummeting lower.


The ability of SPX to rebound from critical support at 3,810-3,837 is technically constructive as it gives the bulls hope for a sustainable recovery. The recent rebound from the bottom of the Jan 2022 downtrend channel, 38.2% retracement from Mar 2020-Jan 2022 rally, 61.8% retracement from Oct 2020-Jan 2022 rally, and the 30-mo ma prevented a deeper market selloff.


Although SPX may be putting in a near-term bottom, it may be too early to confirm an intermediate-term market bottom. Below 3,810.32 warns of a cyclical bear decline toward the low-to-mid 3,000s (50%-61.8% retracements from the Mar 2020-Jan 2022 rally).


Short-term technical indicators show SPX is creating a near-term rather than an intermediate-term market bottom.


Some investor and market sentiments surveys have reached pessimistic conditions. The AAII investor's bull/bear survey shows Main Street retail investors at extreme bearish readings. On the other hand, Wall Street and professional money managers' sentiment studies are far less bearish. A market capitulation requires all market participants to sell. Is a selling climax needed to confirm a market bottom? Or will SPX undergo an extensive trading range between 3,800 and 4,500 to establish the necessary technical base to substantiate a sustainable breakout?


Many technical indicators are also showing mixed readings. The SPX advance-decline market breadth has improved, rebounding from the bottom of its Nov/Dec 2021 downtrend channel. The breadth indicator needs to breakout above the top of the downtrend channel to confirm expanding breadth. Expanding breadth is often a precursor to sustainable and longer-lasting recoveries and rallies.


The RSI overbought/oversold indicator (47.67) nears the neutral level (50), suggesting SPX is neither oversold nor overbought. However, above 50 confirms a near-term breakout and hints at another rally toward overbought levels (70). Can an RSI rally to 70 triggers an SPX price rally toward 4,300-4,500?


After last week's volatile trading, two technical indicators, including the % of SPX stocks trading above 200-day ma (34.27%) and above the 50-day ma (32.06%), are rebounding off of supports (bottom of downtrend channels), confirming near-term SPX oversold rallies. The ability to breakout above the top of downtrend channels is required to reaffirm an intermediate-term SPX bottom.


VIX Index is mixed as it has failed to clear above pivotal resistance in the mid-30s. The failure to breakout is bullish near-term and hints at a near-term peak in VIX. Below 25-25.5 may trigger a decline to the low-20s, prompting an SPX recovery. However, the intermediate-term trend in VIX remains in an uptrend via a technical base, suggesting a bearish intermediate-term condition for stocks.


In summary, since late last year, the downtrend channel suggests the primary trend for SPX is a downtrend. Any rallies are oversold rallies until a confirmed breakout of the downtrend. Technical indicators are mixed. Some have improved near-term but require additional technical work to substantiate intermediate-term recoveries.


The daily hammer reversal pattern on 5/20/22 signals a short-term buy signal. Oversold rallies can sustain for 1-3 weeks, possibly into the next FOMC meeting in mid-June. The market actions will help decide if this is a near-term or an intermediate-term market bottom.


Source: Chart courtesy of StockCharts.com

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Technical Summary Equities – The primary trend for SPX is the Jan 2022 downtrend channel as defined by 3,730 and 4,457. A fourth oversold rally from 6/17/22 low (3,636.87) nears key resistance at 3,90