From an intermediate-to-longer-term technical perspective, the S&P 500 Index (SPX) remains bullish, evidenced by the Mar 2021 uptrend channel. The recent 10/22/21 breakout above 4,545.85 still suggests 266.91 points or an SPX target at 4,791 (top of the uptrend channel) and then 4,813, possibly toward the end of the year to early-2022.
However, on a near-term basis, negative divergences are developing between key technical indicators and SPX prices. An overbought condition, negative divergences in various technical indicators, and a recent negative outside day (11/22/21) warn of another SPX consolidation.
The current -3.88% pullback is nearing pivotal initial support at 4,536-4,566 (10/22/21 breakout, 50-day ma, and 38.2% retracement from 10/4-11/22/21 rally). The ability to maintain support can stabilize the selling and ignite a year-end to early-2022 SPX rally.
However, violation of support warns of a deeper correction toward 4,502-4,511 (internal channel and the 50% retracement). A breakdown here signals a decline to 4,437-4,456.5 (bottom of uptrend channel, 61.8% retracement, and 38.2% retracement from 3/4-11/22/21 rally), and 4,279-4,296 (200-day ma and 10/4/21 reaction low). Key initial resistance remains at 4,718.5-4,743.83 (11/5/21 and 11/22/21 all-time highs).
Traders and investors need to closely monitor the above key supports and technical indicators in the days and weeks ahead. Sustained negative divergences between SPX price and technical indicators can lead to the following market scenarios, including consolidation (3-5%), correction (6-10%), deep correction (11-19%), or the start of a bear decline (20%-plus).
Four important technical indicators continue to show near-term negative divergences. For example, the RSI overbought/oversold indicator (42.59) continues to decline as it retests pivotal support in the low-30s. The MACD price momentum indicator peaked near its Apr 2021 high and is putting in a lower-high pattern. The market breadth indicator, the Advance-Decline line, is also contracting near-term, and this warns of a near-term consolidation. The SPX implied volatility index (VIX – 27.19) has also recently broken out above the top of its Mar downtrend above 25. Above 31-32 or the Feb/Mar/May 2021 highs confirm higher volatility. The ADX (27.15), +DI (18.60), and -DI (29.47) indicators are showing near-term weakness in the trend’s strength and direction.
Divergences in technical indicators often signal a pause in the existing primary trend or a potential reversal in the current trend. Based on the bullish intermediate-to-longer term uptrends for SPX and the continued favorable S&P 500 sector rotations, the recent divergences suggest either a near-term consolidation (3-5%) or a corrective phase (6-10%). There is crucial SPX support between 4,437-4,546 (-4.17% to -6.47%). The ability of SPX to maintain this key technical level suggests the SPX is bent but not broken, leading to the resumption of the primary uptrend.