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Brief Consolidation and a Breakout Next Week?

Updated: Dec 20, 2021

Investors continue to evaluate the monetary policy moves made by the Federal Reserve yesterday to accelerate the winding down of its asset purchases and begin the process of interest rate increases for 2022 and 2023.


Central banks' actions overseas also weighed on Wall Street today. A day after the Federal Reserve pivot to a hawkish stance, Central banks overseas are also following the Fed monetary policies by slowing the pace of its bond-buying and increasing their forecasts for interest-rate hikes during 2022 and 2023.


The Bank of England (BOE) became the first major central bank to lift interest rates since the pandemic by raising its benchmark interest rate from 0.10% to 0.25% today. The European Central Bank (ECB) also announced today that they would also slow the purchases of assets under its Pandemic Emergency Purchase Program (PEPP) during the first quarter of next year and end the purchase all together by March 2022.


After an explosive rally yesterday, stocks ended lower on Thursday. The S&P 500 Index (SPX) fell 41.18 points or -0.87%. The Dow Jones Industrial Average (DJIA) declined 29.79 or -0.08%. The Nasdaq Composite Index (COMPQ) and Nasdaq 100 Index (NDX) plummeted 385.15 and 425.66, respectively or -2.47% and -2.61%.


The losses in the COMPQ and NDX marked the sharpest daily declines since 9/28/21. Mega-cap tech shares and growth-related stocks selling were noticeable today as their declines weighed down the entire market. On the positive side, not all markets fell. The New York Composite Index (NYA) gained 35.52 points or +0.21%. Traders also favored cyclical, defensive, and value-related stocks and sectors. By the end of the day, only three of the eleven major S&P 500 sectors closed lower (i.e., XLK -2.83%, XLY -2.21%, and XLC -0.14%), while the remaining eight S&P 500 sectors gained from 0.05% to 1.26%.


As investors continue to digest the new monetary policies from the Fed and other central banks, a brief review of the S&P 500 Index (SPX) hints at recent consolidation setting the stage for the next rally.


A potentially constructive head and shoulders bottom pattern may be taking shape. The key resistance is the neckline resistance at 4,713.5-4,743.83, coinciding with November and December highs). The rally today to 4,731.99 faded near the formidable neckline resistance. The head occurred during the sell-off to 4,495.12 on 12/3/21. The minor dip on 11/10/21 at 4,630.86 defines the left shoulder. The decline two days ago to 4,606.52 (12/14/21) establishes a potential right shoulder.


The height of the technical base is 248 points. A breakout above neckline resistance at 4,714-4,744 completes the bullish continuation pattern and suggests an SPX target at 4,992.5. From a timing perspective, it took sixteen (16) days to develop the left side of the head/shoulders bottom pattern. It is approximately nine (9) days since the formation of the head. Based on the symmetry of the technical base, a breakout can occur as early as next week.


Source: Courtesy of StockCharts.com

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