Another critical battle between the Bulls and the Bears
Earnings season will end soon, and estimates are weaker than last year. Recent sentiment surveys and economic numbers are softer than expected, including the February Consumer Confidence Index, December Case-Shiller National Home Price Index, and February Manufacturing Purchasing Managers Index (PMI). The lower readings indicate softer consumer demand, a deteriorating real estate market, and a slower economy.
Although the above data are newsworthy, they have not moved the markets as much as the concerns about stubborn inflation and the hawkish comments from Fed officials. Inflation remains far above the Fed's 2% target level.
Some traders are now expecting a higher terminal rate closer to 5.4%-5.5%. The next FOMC meeting is still several weeks away (3/22/23). The stock market will remain jittery until the bulls or bears gain the upper hand.
So, what tailwinds or headwinds can break the market out of the recent choppy trading condition?
Technically speaking, the SPX Index is trading at a critical juncture, hanging on to pivotal support near the extension of the Jan 2022 downtrend breakout line and the crucial 200-day ma. There is a chance the index can rebound from support and enter into another base until the next FOMC meeting. The outcome of basing effort can lead to a breakout or breakdown of its trading range.
The bulls want to see another right shoulder develop, rebounding from its downtrend trend and 200-day ma. A short-term downtrend that started on 2/2/23 remains intact. Any rebound from the 200-day ma still must clear above key initial resistance at 4,100-4,200 (Feb 2023 short-term downtrend and Jan, Feb, Mar 2022 lows and Jun, Sept, Dec 2022, and Feb 2023 highs).
Intermediate-term resistance remains near neckline resistance at 4,308-4,345 (May/Aug 2022 reaction highs, top of the Sept/Oct 2022 uptrend channel, and the 61.8% retracement from Jan-Oct 2022 decline). A surge above the neckline confirms a head/shoulders bottom breakout and signals the start of a sustainable intermediate-term rally.
On the other hand, the bears want to see a breakdown. They point to the three bullish positive outside days (i.e., 2/7, 2/23, and 3/2/23) and the lack of follow-thru rallies to suggest this is another oversold rally operating within the Jan 2022 primary downtrend. A violation of the 200-ma (3,940) warns of a decline toward 3,764.5-3,810 (May and Dec 2022 lows). A decisive close below 3,764.5 opens the door for a deeper correction toward 3,491.58-3,584 (Sept/Oct 2022 reaction lows).
In the meantime, until the next FOMC meeting on 3/22/23, it is reasonable to expect a choppy market environment. The outcome of another battle between the bulls and bears will determine the next SPX directional trend.
Under the bullish scenario, the ability of SPX to find support near 3,940 can lead to another rally toward 4,100-4,200 and possibly 4,314-4,345.
Under the bearish scenario, failure to maintain support at 3,940 can trigger a decline toward 3,764.5-3,810 and below this to 3,491.58-3,584.