False or Incomplete Market Bottom?
This week is another options expiration week. Heading into Friday’s options expiration tends to be historically volatile as multiple options expire at the end of the week. In the past options expiration weeks this year, including the one during March 2022, there was heavy selling in the month before options expiration week but a subsequent sizeable rally during options expiration week.
Can we expect another strong rally like March 2022 scenario?
Like the prior period, September was a brutal month for SPY as it fell 12.93% last month. It has been a mixed month during October, with a swift rally (6.28%) at the beginning of the month followed by a sharp downturn (-8.26%) into mid-month.
SPY may be nearing another critical juncture of its oversold rally that began in earnest soon after a bullish outside reversal day on 10/13/22. Initial resistance appears at 380 +/- 5, coinciding with the 38.2% retracement (379.34) from the Aug-Oct 2022 decline, the 10/5/22 high (379.46), and the top of the Aug 2022 downtrend channel (382). The ability to clear this pivotal initial is the first step to establishing a sustainable market bottom.
Interestingly, the buy/sell volume histogram chart also shows that the sell volume more than triples the buy volume along the 385 to 390 SPY price levels. Formidable secondary resistance also corresponds to the mid-Sept 2022 technical breakdown (387-388), the 9/21/22 bearish negative outside reversal day high (389.31), the 50% retracement (388.08) from the Aug-Oct 2022 decline, the declining 50-day ma (389), and 6/28/22 negative outside reversal day high (391.55). A convincing breakout here reaffirms the 10/13/22 low as a potential near-term market bottom, extending the SPY recovery.
Formidable intermediate-term resistance remains at 405-410 or the convergence of the 61.8% retracement (398.63) from the Aug-Oct 2022 decline, 9/13/22 gap-down (401.5-407), 9/12/22 island reversal high (410.05), 200-day ma (410.60), the nearly 2:1 sell to buy volume histogram price range (405-410), and Jun 2022 high or the left shoulder (413.94). A surge above this resistance zone bodes well for a more sustainable bottom allowing for a 100% retracement to the Jan 2022 downtrend (421) and then the 8/16/22 reaction high (429.96).
The convergences of technical indications suggest initial resistance for SPY at 385-390 and intermediate-term resistance at 405-410.
Although another options expiration week is upon us, and the previous Mar 2022 options expiration witnessed a sizeable rally, there are no guarantees of this scenario repeating.
Remember, technical rallies can be explosive as it entices many to buy. However, they remain oversold rallies as long as the primary downtrend (Jan 2022 top) is intact. It is a dangerous market environment until the confirmed reversal of the downtrend.
Every bottom is different. Some bottoms may take considerable time and effort to build the necessary technical base to stage a sustainable recovery (i.e., head/shoulders bottom, ascending triangle, cup-and-handle, etc.).
A few are quick and spontaneous, ending abruptly and reversing the trend soon after (i.e., V-bottom, selling climax, selling exhaustion, capitulations, etc.).
Yet many others are false or incomplete bottoms requiring further selling before finding the final market bottom.
There are still risks in the marketplace. On the downside, 348.11 (10/13/22 low) is pivotal support. Violation here suggests that this is a false or incomplete bottom, prompting a decline toward the bottom of its Aug 2022 downtrend channel at 335.
Will the next selloff be sufficient to create a solid market bottom that attracts long-term buyers to return?