The release of the January Personal Consumption Expenditure (PCE) report on Friday came in higher than expectations, indicating inflation remains stubbornly high and the Fed will need to tighten further to contain inflationary pressures.
The economic numbers from last week open the question as to the shape of the landing – a soft, a hard, or no landing. Fed officials suggest hiking rates will contain inflation without sending the economy into a recession. The stock market (SPX) suggests otherwise, as it is not this simple.
The devastating -27.54% decline from the 1/4/22 all-time high of 4,818.62 and the subsequent impressive +20.16% rally from the 10/13/22 low of 3,491.58 continue to confuse investors.
Some refer to the recent recovery as a bear market rally, false breakout, or a head fake. Others claim this to be a sustainable bull market recovery, a legitimate breakout, or a base formation.
On the charts, it is mixed. Popular indicators such as RSI and MACD trends continue to diverge from price trends.
Nonetheless, the hallmark of an uptrend remains the same – a series of higher highs and higher lows can confirm a bottom and, most importantly, reaffirm a trend reversal.
Market trends tend to fluctuate, and challenging to know when the trend has changed. Except for a few occurrences (i.e., V-pattern), most recoveries tend to follow a familiar path of consecutive higher highs (swing highs) and higher lows (swing lows).
From 3,491.58 (10/13/22 low), a higher low developed, as evidenced by 3,764.49 (12/22/22 low). A higher-high also developed, as 4,195.44 (2/2/23 high) is higher than 4,100.96 (12/13/22 high).
Staying with the theme of a higher low and higher high pattern as the foundation for a solid basing effort would imply the recent February pullback may be nearing a critical phase.
Although failure to follow thru with a third higher high above 4,195.44 (2/2/23) can lead to another consolidation phase, delaying the recovery and creating a trading range, the consolidation over the next few days holds the keys to the next directional trend.
Crucial initial support remains at 3,940-3,996, coinciding with the Oct 2022 uptrend (3,996), 50-day ma (3,979.73), the extension of the Jan 2022 downtrend channel (3,979), and the 200-day ma (3,940.03). Failure to hold support warns of a retest of 3,764.49 (12/22/22 higher low). Violation negates a higher low, leading to a retest of the mid-Oct 2022 reaction low of 3,491.58.
On a positive note, the ability to maintain 3,940-3,996 and 3,764.49 hints at another rally to 4,195.44. Above this confirms the next rally to pivotal resistance at 4,312-4,325.28 (8/16/22 reaction high and the 61.8% retracement from Jan-Oct 2022 decline). A breakout solidifies the Oct 2022 low as a market bottom and reaffirms the resumption of the recovery.