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Another negative outside day

Traders continue to chase the stock market rally, with the S&P 500 Index coming within striking distance of the all-time highs (4,744-4,819). However, around 2 pm today, stocks suddenly reversed direction and tumbled into the close. Within two hours, SPX fell 70.02 points or -1.47%. The VIX index spiked to 13.67, gaining 1.14 points or +9.10%.


Should traders panic based on the sharp intra-day stock market reversal?


No, these sharp swings have become common occurrences over the past year. Nothing new has come from the Fed regarding the pivot. The low volume also suggests traders may have gone on vacation early before the start of the holiday season.


Nonetheless, there may be bumps in the road toward the end of the year, given the lack of liquidity, low volume, and lack of macroeconomic news. A brief review of the daily SPX chart shows SPX has rallied +1,286.43 points or 36.84% from the 10/13/22 low (3,491.58) to the recent intra-day high of 4,778,01 (12/20/23).


However, the impressive rally has not been a straight line, as SPX has experienced seven sharp up-and-down moves in the past year.


There were four powerful rallies, including +609.38 points or +17.45% from 10/13/22-12/1/22 (42 days), +430.95 or +11.45% from 12/22/22-2/2/23 (28 days), +798.21 or +20.96% from 3/13-6/27/23 (75 days), and +674.23 or +16.43% from 10/27-12/20/23 (37 days). The average of the four rallies is 16.57% in 46 days.


There have also been three sharp declines, including -336.47 points or -8.20% from 12/1-12/22/22 (16 days), -386.58 or -9.21% from 2/2-3/13/23 (26 days), and -503.29 or -10.92% from 7/27-10/27/23 (65 days). The average decline is 9.44% in 36 days.


Although the 10/27/23 rally of 16.43% in 37 days can continue into the seasonal strength period, the recent impressive rally matched the average returns and durations of the four rallies of 16.57% in 46 days.


Technical indicators remain generally positive, evidenced by the recent breakouts in the advance minus decline market breadth and the MACD price momentum indicators. Two indicators warn of near-term consolidation. The VIX index rebounding from critical support near 12 warns of increased volatility. The RSI indicator soaring to a high of 81.82 (12/19/23) and declining below 70 at 66.12 (12/20/23) also warns of consolidation. The +DI and -DI trends have also expanded to an extreme level, suggesting a contraction is likely in the near term.


Remember, the lack of liquidity into the holiday season can lead to sharp swings in either side of the market. An overbought condition (RSI = 66.12) coupled with a negative outside day on 12/20/23 and failure to clear pivotal resistance at 4,744-4,819 (Nov 2021 and Jan 2022 all-time highs) may warn of another near-term pullback.


Initial support is 4,607-4,637 (Mar/Jul 2023 highs or -2.95-3.58%) and below 4,422-4,453 (11/14/23 gap-up, 50-day ma, and 50% retracement from 10/27-12/20/23 rally or -6.80-7.45%), and 4,325-4,328 (Jun 2023 breakout and 200-day ma or -9.42-9.48%). A pullback to the 200-day ma would match the average decline of 9.44% over the past three pullbacks.


Source: Chart courtesy of StockCharts.com

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