Despite reporting better-than-expected CPI inflation data for November, investors turned defensive soon after a more hawkish Fed meeting last week. As expected, the Fed raised interest rates by 0.50%, bringing the target rate to 4.25-4.50% and indicating a 5.1% peak fed funds rate. A weak retail sales number and rising recession fears led to a sharp market decline at the end of last week.
Historically, the second half of December tends to be favorable, often synonymous with a Santa Claus rally. Unfortunately, the market actions from last week warned of a change in market psychology toward a defensive risk-off environment. S&P 500 Index (SPX) will likely remain volatile for the remainder of the year and possibly into early 2023.
Last week's high was 4,100.96. The low was 3,827.91, and the weekly close was 3,852.36. At the end of last week, a confirmed bearish negative outside week pattern developed in SPX and other market indexes.
The negative outside week coupled with a subsequent small head and shoulders top breakdown indicates a high probability the mid-October 2022 oversold rally has ended and the resumption of the primary 1-year downtrend.
So, what is the next significant support(s) for SPX?
Based on the weekly bearish reversal and the confirmation of a head and shoulders top breakdown, SPX is likely to decline toward the h/s top breakdown projection at 3,712, and below this, the Jun 2022 low at 3,637 and then the 10/13/22 reaction low at 3,491.58.
Violation warns of a decline to the Aug 2020 V-pattern breakout at 3,393.5. Below this is to the Sept 2020 low at 3,209.5 and the 61.8% retracement from the Mar 2020-Jan 2021 rally at 3,196.
Resistance is 4,023 (200-day ma) and 4,100-4,113 (Nov and Dec 2022 highs and the Jan 2022 primary downtrend).
How about the other indexes, including INDU, NYA, COMPQ, NDX, MID, and SML?
INDU continues to outperform its peers. A violation of the 200-day ma at 32,451.42 can trigger a sell-off. The Sept and Oct 2022 reaction lows at 28,716 and 28,661 remain far away. A decline of this magnitude toward the previous reaction lows would imply significant technical damages to the Dow 30 stocks. It would further reinforce a rolling bear market scenario as the remaining leadership names and sectors succumb to the 1-year bear decline.
NYA nears the rising 50-day ma at 14,902.60. A violation warns of a decline toward Jun/Jul 2022 lows 13,993/13,989 and below this to the Oct 2022 reaction low at 13,278.56. A bullish head and shoulders bottom may be developing. Neckline resides near 15,854-16,023 (Jun, Aug, and Dec 2022 highs). Left shoulders are 13,989-13,993, and the head is 13,278.56 (10/13/22 low).
COMPQ has underperformed its peers as broken its 50-day ma (10,925.88) and 200-day ma (11,876.02). Significant support is the Oct and Nov 2022 reaction lows at 10,089-10,263. Violation here warns of a retest of the Jun 2020 V-pattern breakout at 9,838 and below this the 78.6% retracement from 2020-2021 at 8,682.
NDX also underperformed its peers. The next significant support is the Oct/Nov 2022 reaction lows at 10,441-10,632. Violation here signals a decline to the Jun 2020 V-pattern breakout at 9,736.5 and below this, the 78.6% retracement from 2020-2021 at 8,910.
MID has also broken its 200-day and 50-day moving averages at 2,459.71 and 2,437.78, respectively. The Jun, Sept, and Oct 2022 lows at 2,187-2,192 provide significant support. Violation here warns of a retest of the Nov 2020 V-pattern breakout at 2,109 and the 50% retracement from the 2020-2021 rally at 2,054.
SML has also violated its 200-day and 50-day moving averages at 1,202.23 and 1,180.96. The Jun, Sept, and Oct 2022 lows at 1,082 and 1,061 offer significant support. Breakdown warns of a decline to the Nov 2020 V-pattern breakout at 1,046 and the 50% retracement from the 2020-2021 rally at 1,027.