The 6/21/22 island reversal triggered an impressive 18.93% oversold rally in the SPX Index in 41-trading days. The 6/17/22-8/16/22 oversold rally failed to surpass pivotal resistance along the 200-day ma (currently at 4,199) and the top of the Jan 2022 primary downtrend channel (currently at 4,248), resulting in the resumption of the downtrend.
Another island reversal appeared on 10/4/22, just 2-days after SPX recorded a lower-low pattern on 9/30/22 at 3,584.13.
So, what can we expect from the recent bullish near-term reversal?
From a seasonality perspective, markets tend to be favorable between November and January. Ideally, this is the time window for the highest probability of a sustainable oversold rally. See yesterday’s Blog entitled, “Will October be a bear market killer?” for further information on seasonality and midterm elections statistics.
Market internals and technical indicators have improved. For instance, the market breadth reading or the advance minus decline line has rebounded from the bottom of its downtrend channel. Does this imply SPX market internals is improving, at least from a near-to-medium-term basis?
Historically, the price momentum low tends to precede the price low. Did the MACD indicator achieve a bottom in late-Sept 2022? Is this positive divergence signaling the next SPX rally?
The RSI overbought/oversold indicator traded to another oversold reading (27) in late-Sept 2022. The current rebound nears critical resistance at 50-55, coinciding with the 9/12/22 high and the 50-neutral level. Can an RSI breakout extend the SPX recovery?
If the current 9/30/22 oversold rally follows a similar path to the previous oversold rally, then SPX can rally until 11/9/22 or the day after mid-term election day (11/8/22) and a week after the Fed FOMC meeting on 11/2/22.
Under this market scenario, how high can SPX rally?
There are two critical resistances.
Key initial resistance is 3,950 +/- 50, coinciding with the 38.2-50% (3.867-3,954.5) retracements from 8/16/22-9/30/22 -17.14% decline, 9/16/22 gap-down (3,881-3,888), 9/21/22 negative outside day high (3,907), 6/28/22 negative outside day high (3,945.86) and potential left shoulder to a 4-month head/shoulders top and the 50-day ma (3,999.74).
The ability to surpass 4,000, coupled with a surge above 4,119 (9/12/22 high or right shoulder 2), can extend the oversold rally to intermediate-term resistance at 4,250 +/- 50. The formidable resistance corresponds to the 6/2/22 high (4,177.5) or left shoulder 1, 200-day ma (4,199), 8/22/22 gap-down (4,195-4,219), 8/26/22 negative outside day high, and right shoulder 1 (4,203) and the top of the Jan 2022 downtrend channel (4,258), and 4,325 (8/16/22 high or head).
On the downside, failure to maintain the 9/30/22 low (3,584.13) warns of the next SPX selloff toward the bottom of the downtrend channel at 3,391.