Buy, Hold, or Sell?
With a surprise oil production cut from OPEC and the release of job numbers, US stocks corrected today.
The question is whether this is a buy, hold, or sell.
SPX retains its trading range between 3,750-3,800 and 4,100-4,200 since November 2022. SPX is attempting to break through the upper end of its trading level for the fifth time.
It may be the line in the sand defense from the bears or pivotal resistance. If the bulls can push SPX through this critical resistance, this confirms the start of a new bull market.
On the other hand, a bearish head shoulders top has also developed over the past 5-months. The left shoulders correspond to 4,100.51/4,100.96 (12/1 and 12/13/22 highs) and 4,094.21 (1/27/23 high). The head is 4,195.44 (2/2/23 high), and the right shoulder is 4,078.49 (3/6/23 high).
SPX nears a critical juncture as a negative outside negative day (4/4/23) warns of another right shoulder (4,133.13) to the Nov 2022 head and shoulders top pattern.
A moderately overbought condition has developed into the Mar 2023 rally, as evidenced by the RSI overbought/oversold indicator (60.75) peaking near 63.62 (4/3/23). Although the RSI indicator did not reach extreme overbought levels, failure to breakout above Feb 2023 high warns of a lower high, signaling a near-term pullback toward 50 (neutral zone). If RSI maintains the 50s, this suggests a modest SPX consolidation rather than the start of a deep correction. Also, the advance minus decline line for SPX or market breadth indicator hints at a peak via a lower-higher pattern, suggesting another correction.
On a positive note, the SPX/WLSH breakout supports SPX's outperformance against the broader-based Wilshire 5000 Index, at least from a relative perspective. Also, the MACD price momentum indicator continues to trend higher as it nears the top of the Nov 2022 downtrend channel. A MACD breakout helps to reinforce an SPX price breakout, but a failure warns of a momentum top.
A deeper dive into the SPX price chart shows two bullish back-to-back gap-ups on 3/29/23 (at 3,979.20-3,999.53) and 3/30/23 at 4,030.59-4,032.10. SPX maintaining the 50-day ma (4,025.52) and the 200-day ma (3,949.40) gives the bulls hope for a sustainable intermediate-term recovery.
The ability of SPX to maintain support at 3,939.5-4,032 helps to contain SPX correction. A convincing move above the left/right shoulders 4,078.5-4,133) and preferably above 4,195.44 (2/2/23 high and the head) negates the h/s distribution top and suggests +451.22 (height of the h/s top base) or an SPX target at 4,646.5.
On a negative note, if 4,133.13 (4/4/23) is proven to be another right shoulder and SPX violates its 50-day/200-day ma below 3,039.50-4,032, it warns of a retest of neckline support at 3,764.5-3,810 (Jan/Feb 2023 lows). A breakdown confirms a top and signals the next SPX selloff to 3,491.58 (10/13/22 reaction low) and below this to 3,357.5 (h/s top breakdown projection).
So, is it a buy, hold, or sell?
The technical indicators are mixed, neither decisively bullish nor bearish. The November 2022 head/shoulders top signals near-to-medium-term selling pressure. Maintaining above the 50-day ma and 200-day ma is technically constructive. However, violation of the two key moving averages and, most important, neckline support (3,764.5-3,810) confirms a distribution top. It warns of the next SPX selloff to 3,491.58 and below to 3,357.5 (h/s top downside projection).
On the other hand, a convincing surge above the left/right shoulders at 4,078.5-4,133 and preferably above 4,195.44 (2/2/23 high and the head) negates the h/s distribution top and suggests +451.22 (height of the h/s top base) or an SPX target at 4,646.5.
In summary, the current technical conditions suggest this is a hold.
It turns into a buy if the SPX clears above 4,195.44 (2/2/23 high or head), as the breakout renders an SPX projection of 4,646.5.
It is a tactical sell if SPX violates its 50-day and 200-day ma (3,939.5-4,025.5), signaling an SPX decline to 3,764.5-3,810 (Dec 2022/Mar 2023 lows or neckline support).
It is a strong sell below the neckline as it confirms the 5-month head/shoulders top and warns of a deeper correction to 3,491.58 (10/13/22 reaction low) and below 3,357.5 (h/s top breakdown target).