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Another Oversold Bounce?

Although investors expect the Fed will maintain rates the same after tomorrow’s FOMC meeting, many now believe the central bank will keep rates higher for longer.


Since the stock market peaked in late July 2023, interest rates have jumped nearly 100 basis points. The rising interest rates have led to stocks declining, specifically high beta and growth-related securities falling the fastest. Popular stock market indexes have fallen 10% or more from their recent highs, placing many in correction levels.


Last Friday, the S&P 500 SPX officially entered into correction territory, declining 10% or more from their respective July 2023 highs. However, many benchmark U.S. indexes are far from the official definition of a bear market, dropping 20% or more from their highs.


Is the selling over the past three months associated with the geopolitical tensions arising from the Israel/Hamas war in the Middle East, stubborn inflation, or rising interest rates as the central bank hints at higher for longer?


Historically, it is not wise to bet against the structural uptrends in U.S. stocks since U.S. stocks have a built-in upward bias over the very long term.


The stock market’s explosive rally yesterday and continued strength today have many investors wondering whether October was another bear market killer and whether this is the start of another year-end rally.


However, statistics show that when the S&P 500 Index and other benchmark indexes exceed and stay below the -10% threshold level, it increases the chances that these corrections can turn into bear market declines (-20% or more). Some suspect it is due to changes in market psychology, risk tolerance levels among traders, or price momentum.


During market declines, including corrections, the viability of the market bottom and the sustainability of the rally depends heavily on the integrity of the rally. The market action over the next few days/weeks will help determine if this is indeed the end of the market pullback/correction or if this morphs into the next bear market.


Technically speaking, SPX found support at 4,103.78 (10/27/23 low), rebounding from the 61.8% retracement (4,114) from the 3/13/23 to 7/27/23 rally and the 5/24/23 low. The two-day oversold rally nears its first hurdle, corresponding to pivotal initial resistance at 4,214.5-4,249 (10/3/23 low, 38.2-50% retracement from Oct 2023 decline, and the 200-day ma).


The ability to clear initial resistance extends the recovery toward 4,283 (61.8% retracement from Oct 2023 decline) and above this to crucial secondary resistance at 4,335-4,353 (Jun 2023 h/s top neckline breakdown and the 50-day ma).


Intermediate-term resistance remains at 4,389-4,401 (9/21/23 gap-down, 10/17/23 high, and Jul 2023 downtrend) and 4,433-4,448.5 (Jul 2023 downtrend and the 6/16/23 high or left shoulder). A convincing breakout reverses the primary Jul 2023 downtrend channel and confirms the 10/27/23 low (4,103.78) as an important bottom. It signals the start of a year-end rally toward 4,541.25 (9/1/23 high or the right shoulder) and 4,607.07 (7/27/23 reaction high). Above 4,607-4,637 (Mar 2022 and Jul 2023 reaction highs) further reaffirms the rally toward a retest of 4,744.83/4,818.62 (Nov 2021 and Jan 2022 all-time highs).


On the downside, the primary downtrend from the Jul 2023 high remains intact. Failure to convincingly reverse the Jul 2023 primary downtrend coupled with a violation of 4,103.78 signals the next SPX selloff toward 4,048-4,049 (Apr/May 2023 lows, the Jun 2023 head/shoulders top breakdown target, and 50% retracement from Oct 2022 to Jul 2023 rally) and below 3,909-3,918 (3/24/22 low and the 61.8% retracement from Oct 2022 to Jul 2023 rally), and 3,809-3,810/3,764.5 (May/Dec 2022 and Mar 2023 reaction lows).


Under a severe broad market selloff, SPX can retest its Oct 2022 low (3,491.58).


Source: Chart courtesy of StockCharts.com

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