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Another Santa Claus Rally?

The stock market recovery intensified today, recording its largest 3-day rally since late April 2023. Stock prices recorded gains into the fourth day as bond yields (TNX) fell from their 5% psychological high. Investors cheered after the Fed kept interest rates on hold yesterday and hinted that the rise in interest rates may be acting to fight inflationary pressures.


The risk of recession has receded, the central bank pausing interest rate hikes for the second consecutive meeting, and the retreating of bond yields have helped to lift stocks from oversold levels.


Halloween is over, and pessimism was widespread during September and October. Also, many U.S. indexes fell into correction territories and oversold levels into the July to October stock market selloff.


Although seasonality factors suggest stocks tend to perform better in November and December following a sharp market decline in October, will this trend repeat this year?


Earnings season has been mild due to cuts to fourth-quarter estimates. The soft-landing narrative continues to gain traction. However, the macro and geopolitical uncertainties continue to dominate headline news. Also, the Fed’s rate cuts are still several quarters away and monetary policies remain restrictive for the foreseeable future.


Nonetheless, Santa Claus or year-end rally remains a seasonal trading phenomenon as November and December tend to be favorable for stocks. Also, November through April is the best-performing six-month period for stocks.


Despite the above factors, both stocks and bonds were overdue for a bounce after a deep selloff. However, market breadth and market internals remain challenging, and technical damages have occurred during the summer to fall market selloff.


The lack of breadth and broad leadership in the stock market shows a lack of conviction from the buyers. The uncertainties from macro and geopolitical conditions also warn of top-down selling pressures and market risks.


Market internals must improve, and additional basing efforts are required to sustain SPX rallies. The 4-day oversold rally must also surge convincingly above key resistances to confirm the Oct 2023 lows as a market bottom and reverse the July 2023 primary downtrend channel.


The primary trend from the 7/27/23 high (4,607.07) remains the 4-month downtrend channel between 4,128 and 4,430. An oversold condition and the ability to find support at 4,103.78 (10/27/23 low), rebounding from the 61.8% retracement (4,114) from the Mar to Jul 2023 rally, has ignited an oversold rally.


The gap-up today (11/2/23 at 4,245.64-4,268.26) suggests a retest of key resistance at 4,335-4,369 (Jun 2023 neckline breakdown, the 50-day ma, and the Sept 2023 downtrend). Above this, extend the rally toward pivotal resistance at 4,393.5-4,458.5 (Oct 2023 highs, 9/21/23 gap-down, 61.8% retracement from 7/27-10/27/23 decline, the top of the Jul 2023 downtrend channel, and Jun 2023 highs or the left shoulder). A convincing breakout coupled with confirmed Advance minus Decline market breadth, RSI, and MACD breakouts bodes well for the start of the Santa Claus/year-end rally.


Failure to convincingly reverse the Jul 2023 primary downtrend channel warns of the resumption of the downtrend or a transition toward another technical basing effort, preferably above initial support near the 200-day ma (4,245.32) and the 11/2/23 gap-up (4,245.64-4,268.26) and below to secondary support at 4,104-4,127 (5/24 and 10/27/23 lows and the bottom of the Jun 2023 downtrend channel).


A breakdown below 4,104 warns of the next SPX selloff toward 4,048-4,4049 (Apr/May 2023 lows, the Jun 2023 head/shoulders top breakdown target, and the 50% retracement from Oct 2022 to Jul 2023 rally) and below 3,909-3,928 (3/2 and 3/24/23 lows 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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