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How Low is Low?

Today, stocks plunged after a brief rally yesterday as concerns about an economic slowdown weighed on investors. The losses today encompass almost all popular market indexes (-2.25% to -3.95%) and S&P sectors (+0.14% to -5.06%). Cyclical sectors such as the consumer discretionary sector (XLY) took the brunt of the selling as the sector plummeted by -5.06%, followed by Technology (XLK -3.73%) and Communication Services (XLC -3.28%). Energy (XLY) was the sole winner with slight gains of +0.14%.


The S&P 500 Index (SPX – 4,175.20) has given up 743.42 points from its 1/4/22 record high (4,818.62) and is now down 13.35%.


How low can SPX decline before a final bottom?


We will focus exclusively on the monthly chart of SPX. Why? The monthly charts convey structural trends the best, at least from a visual perspective. The 10-month and 30-month moving averages offer dominant and prevailing structural trends by filtering the day-to-day and week-to-week fluctuations and noise in the marketplace. The Fibonacci retracements are also helpful in identifying potential pullbacks and reversal points. The monthly chart can pinpoint pivotal monthly reversal levels, namely the intra-month highs and lows. Large and significant technical patterns tend to be more visible in the monthly charts.

Summarized below is a monthly analysis of the SPX Index.


From Mar 2020 pandemic low, SPX recorded a new all-time high on 1/4/22. Despite setting a record high, a negative outside month pattern also developed. The failure of SPX to convincingly clear the top of the 2009/2010 uptrend channel (now at 4,960) hints at a market top. A subsequent breakdown below the 10-month ma (4,475.91) in January warns of an intermediate-term market top.


A potential inside month has now developed with three (3) days before the end of the month, suggesting investors are confused and indecisive. The 2/24/22 low at 4,114.65 remains crucial neckline support, coinciding with a complex head and shoulders top pattern. A breakdown below 4,115 signals a downside target at 3,797-3,818 (30-month ma and the 38.2% retracement from Mar 2020 to Jan 2022 rally). The decline from the all-time high translates to a -20.75 to 21.20% drop, placing the Jan-April 20022 downturn as a cyclical bear decline.


The monthly MACD price momentum and the RSI overbought/oversold indicators warn SPX may need to decline further before achieving its final bottom.


Failure to maintain support at 3,797-3,818 opens the door for a more extensive SPX sell-off toward 3,364-3,509 (50% retracement of the 2020-2022 rally, the head/shoulders neckline breakdown target, Aug 2020 breakout, and the bottom of the 2009/2010 uptrend channel). The sell-off equates to a -27% to -30% cyclical bear decline.


The 61.8% retracement from the 2020-2022 rally converges at 3,200, providing the all-important and line-in-the-sand support (-33.6% from all-time high). Violation here ends the 2009 structural bull trend and warns of the start of a structural bear.


Key resistance is 4,476-4,637, coinciding with the 10-month ma and Mar 2022 high or the right shoulder of the head/shoulder top pattern. A breakout above 4,637 negates the distribution top and signals a rally to 4,818.62-4,960 (1/4/22 all-time high and the top of the 2009/2010 uptrend channel. A breakout here signals the resumption of the structural bull.


The monthly MACD price momentum indicator generated a sell signal last month (Mar 2022), suggesting a longer-term price momentum reversal. Does this imply MACD will retest the Nov 2022 channel breakout?


Despite the recent sharp SPX selling over the past few months, the monthly RSI overbought/oversold indicator (54.65) is not trading at oversold conditions. Does RSI need to retest the prior oversold conditions from the March 2020 pandemic low (42), the Jun 2010 low (44.90), and Sep 2011 (43.27)? Under panic-type selling, will RSI revisit the global financial crisis bottoms of 17.96 (Feb 2009)?


The above monthly analysis strongly suggests SPX may still be vulnerable to further selling. The MACD price momentum indicator has generated a monthly sell signal, suggesting a reversal in the price trend. Despite the selling, the RSI overbought/oversold indicator has to decline further to reach oversold readings. Investors do not appear fearful enough to substantiate a capitulation or selling climax bottom.


A violation of the 2/24/22 low of 4,114.65 can finally lead to a market panic sell-off via stop-loss executions and broad de-risking strategies.


The breakdown will complete a head and shoulders top pattern, further reaffirming an SPX sell-off toward 3,797-3,818 (30-month ma and the 38.2% retracement from Mar 2020 to Jan 2022 rally).


Will SPX finally find a bottom here? Or does SPX retest 3,364-3,509 (50% retracement of the 2020-2022 rally, the head/shoulders neckline breakdown target, Aug 2020 breakout, and the bottom of the 2009/2010 uptrend channel) to finally achieve the bottom?


Source: Chart courtesy of StockCharts.com


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