It is difficult to know with any certainties as to when a solid and sustainable bear market bottom will develop. Many contrarian investors look for extreme market sentiment conditions and panic-type selling activities to signal a wash-out scenario. Others believe a market decline is closer to a bottom when day traders and speculative traders have liquated their leveraged positions.
As a general rule, the easiest way for a market bottom to develop is via panic-type selling, which is denoted by extreme pessimism and market sentiments, leading to a selling climax or capitulation bottom. The selling scenario often occurs under unorderly, widespread, and indiscriminate selling.
It is worth noting during the recent 3/29 to 5/12/22 market decline of 778.43 points (-16.79%), the selling in the SPX Index has been orderly, and rallies have been tepid and short-lived. It is not the classic sign you would expect to produce a solid market bottom and the start of a sustainable intermediate-term market recovery.
The fear indicator or the VIX Index (27.47) has failed to breakout above pivotal resistance at 37-41, coinciding with the late-2021 and 2022 highs. Also, when the SPX Index broke its psychological support at 4,000 last week, panic-type selling and extreme volume did not appear, suggesting the lack of institutional selling and capitulation. In the Mar 2020 pandemic selloff, explosive selling volume leads to fear and panic-type selling activities.
Although SPX traded to the threshold of a bear market decline (-19.92% from 1/4/22 high to 5/12/22 low), VIX and other sentiment indicators are not painting an extreme picture of a disorderly or panic-type market environment. A wall of worry is developing into the recent market downturn, and near-term oversold conditions can easily ignite another oversold rally.
It is crucial over the near term for investors and traders to closely monitor the market actions to determine if this is another oversold rally or the start of a sustainable bottoming process. Remember, a selling climax is not necessary to substantiate a market bottom. However, it is the easiest way to detect a market bottom.
Another way a market bottom occurs is through a technical base-building process via higher-lows and higher-highs sustaining for days, weeks, months, and even years. Given the technical damages incurred during the market decline this year, there will be formidable overhead resistance on market rallies.
Some of the resistances are more important than others. Look for the convergence of key moving averages, trendlines, prior breakdowns/breakouts, previous highs and lows, and retracements to determine the significance of each of these resistances.
The SPX resistances in bold below denote convergences of multiple technical levels, suggesting the levels can act as critical supplies on subsequent market rallies.
Resistance 1 = 4,046-4,063.5
Resistance 2 = 4,114.65
Resistance 3 = 4,156-4,163
Resistance 4 = 4,248-4,269
Resistance 5 = 4,299.5-4,308.5
Resistance 6 = 4,325-4,389
Resistance 7 = 4,417
Resistance 8 = 4,476-4,546
Resistance 9 = 4,637.30