The June-Aug summer rally quickly faded as stocks resumed selling. In the past few weeks, technical developments warn of a retest of the June 2022 lows and the possibility of violations of the summer reaction lows.
Stocks fell sharply last week after Tuesday's release of the August Consumer Price Index showing prices continue to be firm. SPX Index (SPX) ended last week at 3,873.33, falling 4.8%. The Dow Jones Industrial Average (INDU) also fell 4.1% to end Friday at 30,822.42. The Nasdaq Composite Index (COMPQ) witnessed a sharp 5.5% selloff, closing at 11,448.40 on Friday, September 16, 2022.
The persistent selling merits technical reviews of the S&P 500 Index from different time frames.
The shorter-term daily chart shows a large gap-down on 9/13/22 as SPX traded below the 50-day moving average. The gap-up on 9/9/22 and a 9/13/22 gap-down warn of a bearish island reversal. In the process, SPX violated the pivotal Jun 2022 uptrend and the crucial 50-61.8% retracements from the Jun-Aug 2022 rally. A 4-month head and shoulders top pattern can lead to a neckline at 3,636.87 (6/17/22 reaction low). Violation of neckline support confirms a distribution top and signals the next SPX selloff.
The intermediate-term weekly chart confirmed a negative outside week at the end of last week. Also, failure to clear above the 10-week and 30-week moving averages increase the odds of rolling the weekly moving averages and reaffirming the resumption of the primary downtrend.
The longer-term monthly chart suggests three technical developments worth monitoring. Although the end of the month may be more than a week away, the failure of SPX to surpass the declining 10-month moving average coupled with a violation of the rising 30-month moving average warns of a deteriorating long-term trend. On a positive note, the ability of SPX to retain the 40-month moving average gives the bulls hope for the continuation of the structural bull trend.
The quarterly chart reveals an inside quarter (July 2022 quarter). Although an inside pattern is neither bullish nor bearish, it signals an indecisive or neutral market condition. In the past four years, SPX experienced three inside quarters (i.e., Apr 2018, Jan 2019, and Apr 2020) and two negative outside quarters (i.e., Jan 2020 and Jan 2022). The three negative inside quarters led to SPX rallies and the two negative outside quarters led to SPX declines. Will a negative outside quarter (Jan 2022) and an inside quarter (July 2022) lead to a choppy and volatile trading range into the end of the year?
The yearly chart displays an outside year. The close at the end of the year will help to decide the structural trend. If SPX closes at or near the bottom of the range, this confirms a negative outside year. However, a close toward the midpoint suggests a neutral trading range market. If SPX closes the year at or near the top of the range, it confirms a positive outside year and signals the resumption of the structural bull trend.