The 3/13/23 to 7/27/23 rally was impressive as SPX gained 798.21 points or 20.96% in 96 trading days. A negative outside day on 7/27/23 (high at 4,607.07), an overbought condition and failure to clear the top of the Mar 2023 uptrend channel warned of consolidation. Recent 18-day consolidation of -271.76 points or 5.90% to a recent low at 4,335.31 (8/18/23) may be unnerving, but it falls within the parameters of a typical market pullback (5%).
The next few days to a couple of weeks will become increasingly important, as the outcome of the market actions may signal a deep market setback of the magnitude of 5-10% or the resumption of the primary uptrend.
On a negative note, the 8/15/23 violation of the bottom of the Mar 2023 uptrend (now rising at 4,489) and the failure to maintain the 50-day ma (4,456.81) warns of further market volatility over the near term.
Also, a potential head and shoulders top pattern has quietly appeared in the past 3-months. For instance, the left shoulders are 4,448.47 (6/16/23 high) and 4,458.48 (6/30/23 high). The head is 4,607.07 (7/27/23 high), and the left shoulder is 4,527.37 (8/10/23 high).
Violation of neckline support at 4,328.08-4,335.31 (6/26 and 8/18/23 lows) confirms a head and shoulders top and warns of a decline of 278.99 points or an SPX downside target of 4,049.09 or 12.11% losses from 7/27/23 peak. If this were to occur, it would satisfy the definition of a market correction, alleviating an overbought condition and setting the stage for a year-end rally.
Interestingly, the decline will also retest critical intermediate-term support, corresponding to the Mar 2022 channel breakdown downside projection (4,202), the May 2023 breakout (4,195.44), the bottom of the Oct 2022 uptrend channel (4,186), the 38.2% retracement (4,180.05) from Oct 2022 to Jul 2027 rally, the 61.8% retracement (4,144.78) from Mar to Jul 2023 rally, 200-day ma (4,135.51), and the 5/24/23 island reversal bottom and higher-low (4,103.98).
On a positive note, the ability of SPX to maintain above 4,302-4,325 or crucial initial support, coinciding with the 6/1/23 breakout (4,325.28 - 8/16/22 high) and the 38.2% retracement (4,302.15) from the 3/13 to 7/27/23 rally can stabilize the recent selling pressure. However, finding a bottom does not necessarily lead to the next bull rally. Rather the 3-month head and shoulders top still suggest further technical work is necessary before the resumption of the primary uptrend.
There are several hurdles to overcome before traders are comfortable returning to the stock market. The first hurdle is for SPX to regain above the 50-day ma (4,456.81) and surpass the extension of the bottom of the Mar 2023 uptrend channel (currently at 4,489).
The second hurdle is for SPX to negate the 3-month distribution top by rising above the left and right shoulders (4,448.47-4,458.48 and 4,527.37) and preferably surging above the head (4,607.07 – 7/27/23) and 3/29/22 reaction high (4,637.30). A breakout here confirms the next SPX rally toward 4,700-4,737 (top of the Mar 2023 uptrend channel) and above 4,818.62 (1/4/22 all-time high), and 4,886.06 (h/s top breakout projection).