Although the press and media continue to focus on rising inflation, Fed tapering, and rate hikes next year, investors are not overly concerned. The SPDR S&P 500 ETF (SPY – 463.62) has rallied 44.29 points or 10.39% in the past 24-trading days, recording several record highs in the process.
However, the recent failure to clear above the top of the Mar/Apr 2021 uptrend channel at 470.65 (11/5/21), coupled with an overbought condition (RSI = 77.78 on 11/5/21), warns of another consolidation.
While inflation can be troublesome to the stock market if it is not transitory and the Fed can still make a policy mistake, the recent sharp rally over the past month indicates more buyers than sellers.
The four gap-ups in one month are unprecedented. The pivotal 10/22/21 technical breakout also hints at the bulls in control. The breakout above 452.60 suggests 26.24 points or a SPY target at 478.84. An accelerated breakout above the top of the Maar/Apr 2021 uptrend channel at 472.50 also renders a SPY projection at 509 (another 9.8% gains).
Nonetheless, a near-term overbought situation has again developed into the recent rally. It is reasonable to expect SPY to consolidate before resuming its primary uptrend.
A quick review of the daily SPY chart shows pivotal initial support converging near 452.5-456.5 or the 10/22/21breakout, the 38.2% retracement from 10/4/21 to 11/5/21 rally, and the middle of the Mar/Apr 2021 uptrend channel. If this is another normal pullback, then the initial support zone should hold. If not, then expect SPY to retest secondary support at 443-447, coinciding with the 50-day ma, 10/15/21 gap-up, and the critical 61.8% retracement.
Since the stock market has been resilient and the seasonal strength period is currently in play, it is also possible the SPY pullback may not reach the above support levels. The buy-on dip mindset continues to be the dominant and prevailing theme since the Covid-19 pandemic induced stock market bottom over a year ago.
We recommend closely tracking the market action into the end of the week, as retail buyers and professional money managers on the sidelines may buy on dips as they position themselves for another year-end rally.