The recovery of stocks from the mid-October 2022 low continues to be driven heavily by mega-cap technology names. The emergence of the AI-technology coupled with bullish sentiments in semiconductor and other technology-related drove many traders and investors to seek out selected areas of the marketplace as average stocks have severely underperformed technology-related peers.
As the market returns from the holiday, the stronger-than-expected ADP jobs numbers have raised concerns the Fed needs to raise rates for longer, prompting bonds (prices) to sell off, Banks and other stocks to correct. The stock market setback today on the backdrop of stronger-than-expected job numbers spooked traders and investors.
The nearly half-million private sector jobs added in June, or more than twice the number forecasters had expected, have many investors worrying about the direction of interest rates. The benchmark 10-year treasury yields (TNX) surpassed 4.0%, and this warns that headline inflation continues to be stubbornly high, despite the 10 Fed rate hikes as the Fed Funds target range spikes to 5.0%-5.25%.
Is this another correction, or worse, the beginning of the dreaded bear market?
Although it is likely to be choppy trading over the next few days as investors digest today’s job numbers and tomorrow’s unemployment and non-farm payroll numbers, the charts still paint a favorable outlook for US stocks, suggesting the recent consolidation is healthy before the resumption of the primary uptrend.
The two breakouts in 5/30/23 above 4,195.44 and 6/12/23 above 4,325.28 solidify the Oct 2022 low (3,491.58) as a market bottom. It also reaffirms the Jan 2022 downtrend breakout and signals a new primary uptrend. The rising 50-day ma (4,244) and 200-day ma (4,010) reassert a near-to-intermediate-term uptrend. The gap-down on 6/20/23 and the gap-up on 6/30/23 establishes a bullish island reversal. A new March 2023 uptrend channel has also quietly appeared between 4,279 and 4,525, reinforcing the primary uptrend.
Despite the above bullish actions, short-term bearish signs have appeared. A higher-high pattern on the SPX price chart (4,448.47 - 6/16/23 and 4,458.48 - 6/30/23) and a lower-high in the RSI indicator (60.92) warns of a negative divergence. Also, a subsequent gap-down on 7/6/23 (4,422.62-4,436.61) suggests a near-term consolidation.
Is this another consolidation phase or something more?
The near-term consolidation will help to alleviate an overbought condition and set the stage for the resumption of the primary uptrend. Since the primary trend is an uptrend, this would represent another buying opportunity on pullbacks.
Initial support rises to 4,325-4,328 (6/12/23 breakout and 6/26/23 low) and below this 4,244-4,279 (50-day ma and bottom of the Mar 2023 uptrend channel). Violation here warns at a deeper correction toward 4,195.44 (5/30/23 breakout) and below 4,072-4,119 (Sept/Dec 2022 highs and Oct 2022 uptrend) and 4,010-4,049 (Apr/May 2023 lows and 200-day ma). Breaking the 200-day ma negates the constructive developments this year and warns of a false breakout.
The top of the Mar 2023 uptrend channel at 4,525 offers initial resistance. Also, the channel breakout suggests a 246-point rally, rendering the next SPX target at 4,546/4,582 (Sept 2021 high and 5/30/23 breakout target) and above this 4,637 (Mar 2023 high), 4,771/4,818.62 (4-month channel breakout projection/Jan 2022 all-time high), and 5,159 (6/12/23 breakout forecast).
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