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Another Technical Oversold Rally?

Investors anxiously waited to hear the news of the two-day Fed policy meeting. Chairman Powell and the policymakers voted to hike rates by seventy-five basis points, moving the Fed Funds target rate to 1.5%-1.75%.


Fed chief Powell said the central bank continues to hike rates because inflation remains too high, and the labor markets are too tight. By front load hiking of seventy-five basis points, today and another fifty or seventy-five basis points in the late-July FOMC meeting will help contain soaring inflation. Powell also mentioned the central bank will be sensitive and flexible in its monetary policies as they expect the target rates to be 3% by the end of the year and 3.8% by the end of 2023.



The Federal Reserve raised interest rates by the most since 1994. However, investors focused on the flexibility of the policymaker’s statement regarding the possibility the Fed may only hike rates by 50bp in the late-July FOMC meeting. The stocks reacted positively to the Fed’s less hawkish message.


S&P 500 Index climbed 1.46%, Dow Jones Industrial rose 1.00%, and the Nasdaq Composite Index gained 2.5%.


However, the bears continue to fret that the Fed will hike rates too much in a desperate attempt to contain inflation risks. The Fed’s overshooting of rates will trigger the next recession.


What are the charts telling us about the stock market (SPX)?


The primary trend for SPX Index since the market top on 1/4/22 (4,818.62) remains in a decisive downtrend channel as defined by 3,726 and 4,478.


Since the beginning of the year, SPX has experienced four (4) corrections (i.e., -12.37% in 13-days, -10.36% in 10-days, -17.83% in 13-days, and the current -11.29% correction from 6/2 to 6/14/22 in 8-days). The average of corrections is -12.96%, and the average duration is 8.75 days.


Since the beginning of the year, SPX has experienced three (3) oversold rallies (i.e., 8.70% in 12 days, 11.53% in 15-days, and a recent 9.64% rally from 5/20 to 6/2/22 in 8-days). The average rallies are 9.96%, and the average duration is 11.67 days.


The recent 8-day correction from 6/2 high (4,177.51) to 6/14/22 low (3,705.68) appears to have successfully tested the bottom of its Jan and Mar 2022 downtrend channels (3,701-3,726), suggesting another oversold rally.


Although the SPX price momentum indicator (MACD) continues to fall, the RSI overbought/oversold indicator has rebounded from oversold levels (30), and the advance-decline market breadth indicator has bounced from the bottom of its 2022 downtrend channel.


Based on the above technical conditions, another oversold SPX rally is possible. However, because the dominant and prevailing trend remains in a downtrend, it will be another short-lived SPX rally.


The SPX rally will encounter formidable resistance at the 3,974-4,017 (6/10/22 gap-down) and the 61.8% retracement (3,997) from 6/2 to 6/14/22 decline. SPX generates a respectable 7.245-8.4% return.


Under an optimistic scenario, SPX may retest the 50-day ma (4,150.5) and the 6/2/22 reaction high (4,177.5). SPX generates an impressive 12.00-12.73% return, exceeding the powerful March 2022 oversold rally of 11.53%.


Since the previous three (3) oversold rallies spanned from 12-15 days or averaged 11.5-days, this would imply the current oversold rally may sustain until the end of the month.


Source: Chart courtesy of StockCharts.com

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