The question that continues to circulate is whether this is a top or the start of the next rally?
We believe this is not a top in the stock market and the end to the structural bull trend in the S&P 500 Index. The current structural bull trend that started in earnest in May 2013 via the pivotal breakout above 1,576.09 may be maturing, but the bull rally still has legs left.
Why? Unlike bear market bottoms, which are often short and violent, market tops tend to occur slowly with little fanfare. The progression to a market top occurs when markets, sectors, and investment styles peak and collapse one after another in a sequence of rolling bear market declines. Contracting market breadth, lack of buyers, speculation are often technical signs of an impending market top. These conditions were visible ahead of the 2000 Tech/Telecom Dot.com debacle and the 2007-2009 Financial crisis. Currently, we are not witnessing similar conditions as prior market tops.
The recent SPX recovery from the 5.87% September correction is approaching critical price resistance. The four gap-ups within the past six trading days are technically bullish developments. The ability of SPX to clear above its left/right shoulders hints at the negation of a potential head and shoulders top. The surge above the 50-day ma also reaffirms an improving near-term trend.
The above favorable technical developments over the past week suggest the bulls have regained their edge over the bears. A breakout above the 9/2/21 all-time high of 4,545.85 by the end of the week solidifies the 10/4/21 low (4,278.94) as a bottom. The breakout above the head also negates the bearish head and shoulders top. Since the height of the Sep/Oct technical base is 266.91 points, the breakout above 4,545.85 renders a technical target at 4,813, near-term.
The recent rebound toward its all-time highs sets into motion a bullish cup-and-handle continuation pattern. However, to confirm this very bullish technical pattern, SPX needs to develop the handle portion of the formation. Will a minor pullback toward initial support near the 10/19/21 gap-up breakout (4,489-4,496), the 38.2% retracement (4,447.34) from the 10/4/21 to 10/21/21 rally, and the 50-day ma (4,443.78) help to solidify the handle?
In summary, the market actions over the past week, including a very bullish cup and handle pattern, hints at another technical breakout and the resumption of the 8-plus year structural bull. However, the recent sharp recovery has created a near-term overbought condition (RSI is 66.69). Failure to convincingly breakout above 9/2/21 all-time high (4,545.85) may lead to a healthy near-term pullback. The pullback fulfills the handle portion of a very bullish cup-and-handle pattern. The consolidation also alleviates a near-term overbought condition, allowing a better entry point as SPX rallies toward its near-term technical projection at 4,813 during the seasonal strength period from November to December.