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Double Bottom or Triple Top?

Still anxious about the election? The market may not be out of the woods yet, but the Dow Jones Industrial has recorded its strongest post-election day rally in the past 120 years. The S&P 500 Index and the Nasdaq Composite Index also posted their best after the election gains ever. The four-day rally is also impressive. SPX has gained 7.35%, INDU recorded gains of 7.13%, and COMPQ appreciated 8.52%.


Although everyone is still waiting for election results from the key states, investors, at least on a near-term perspective, seem to be comfortable with a Biden presidency, a Republican Senate, and a Democratic House.


In the FOMC meeting today, the FED took no immediate action to help the economy. However, Chairman Powell pledged again to deploy its full range of monetary tools (monetary policy) to try to help the U.S. economy fight the coronavirus pandemic. The Chairman also reiterated the U.S. government needs to join in and pass a stimulus package (fiscal policy) as soon as possible to help American workers.


Historically, a gridlock Congress is generally good for stocks and the economy. However, some have warned that this time could be different because of the severity of the global pandemic. The lack of a vaccine for COVID-19 and the inability of Congress to quickly agreed upon the next stimulus package can jeopardize the economic recovery.


The technical picture shows two conflicting patterns in the S&P 500 Index (SPX – 3,5510.45) - a potential double bottom (W pattern), which is bullish, as well as a triple top (M pattern), which is bearish. Another pivotal near-term battle may be developing between the bulls and the bears. The outcome will likely determine the next directional trend of SPX. Since the technical base is 388.06 points, a convincing move above 3,550-3,588 confirms a double bottom breakout and suggests SPX technical target to 3,938-3,976. On the other hand, a violation of 3,200-3,234 confirms a triple top breakdown and warns of a decline toward 2,812-2,846.


Although the dominant and prevailing intermediate-to-long term trend remains an uptrend, the sharp rally over the past week may have created an overbought condition, at least from a near-term basis. The overbought/oversold indicator, RSI indicator (60.13), is quickly moving toward the 70-level, typically the threshold of an overbought condition. Although an overbought condition can turn even more overbought (i.e., late-Aug to early-Sep 2020 and early Jun 2020), this technical condition often signals the price has risen too far, too fast, and warns of consolidation.


The MACD indicator, a popular price momentum indicator, has been declining since its Jun 2020 peak, as evidenced by a downtrend channel. Although MACD has rebounded from the bottom of its downtrend channel, the indicator needs to surpass above the top of its channel to confirm a price momentum breakout. Failure to breakout would imply consolidation is likely over the near-term.


VIX Index or the implied volatility indicator has fallen from a recent high near 40. The indicator hints of fears abating or subsiding. VIX Index at 27.58 is nearing initial support at 24-25 (Jun/Jul/Oct 2020 lows), and below this to 21-22 (Aug/Sep 2020 lows).


Attached below is a short-term chart of SPX and the associated technical levels.


Source: Courtesy of StockCharts.com

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