Inside Month or Positive Outside Month?
It has been volatile over the past three months, evidenced by the sharp intra-month swings. For instance, from the Jan 2022 intra-month high of 4,818.62 (1/4/22) to the intra-month low of 4,222.62 (1/24/22), SPX fell 596 points or -12.37%. SPX also suffered a sharp decline of 480.66 points (-10.46%) from the Feb 2022 high of 4595.31(2/2/22) to the monthly low of 4,114.65 (2/24/22). With three days left before the end of Mar 2022 and the end of the first quarter, SPX has managed to reverse some of the earlier losses, gaining 460.87 points or 11.20% from its Feb 2022 low.
Is this the resumption of the structural bull or a bear market rally?
Another inside month pattern has developed in Mar 2022. An inside month refers to a technical formation where the current monthly high and low range completely engulfs the previous monthly high and low. Inside months are neither bullish nor bearish. The pattern indicates indecision in the marketplace or the lack of conviction from the buyers and sellers.
Markets spend most of their time consolidating or in trading ranges. When an inside-month pattern develops, it signals a significant price move ahead. The inside pattern works best in a trending market. When the market is choppy or range-bounded it can result in many more false signals. The size of the current inside bar compared to the previous bar is very important. The smaller the inside bar relative to the prior bar increases the odds for a more significant move (i.e., magnitude, size, and duration).
An inside month can give subtle clues as to an eventual breakout or likelihood of a continuation pattern. However, it does not signal the direction of the breakout or breakdown. Nor can it project the next price move. It provides visual evidence that the market has contracted and is ready to reverse direction or continue its primary trend. The monthly close can also signal a market condition that is not as bullish or bearish as the preceding period, allowing astute investors to gauge the next stage of the market trend.
The massive rally from 2/24/22 to 3/28/22 is technically constructive, offering signs of a potential market bottom via a higher-low pattern (4,114.65 – 2/24/22 low and 4,157.87 – 3/8/22 higher low). The ability to clear above its 50-day ma (4,411.24) and 200-day ma (4,478.85) is also promising. It means the monthly and quarterly charts will not look nearly as bad as they may appear.
Also, on the monthly chart, the two key moving averages (10-mo and 30-mo) will play a critical role in determining if the longer-term trend (currently a structural bull trend) can continue. A convincing close above the 10-mo ma (4,492.66) by the end of the month can help negate the recent technical breakdown. Staying above the 10-mo ma trend over the next few months further solidifies the recovery.
Another interesting point worth mentioning. An inside month can turn into either a negative or positive outside month. A monthly close on 3/31/22 above last month's high (4,595.31) confirms a bullish positive outside month. Interestingly, a surge above 4,595 also negates the left and right shoulders, negating a formidable head and shoulders top pattern. A move above 4,818.62 or the 1/4/22 all-time high and the top of the Jan 2022 negative outside month further reaffirms a breakout, hints at a mid-term election year cycle low, and signals the resumption of the structural bull trend. Since the height of the technical base is 703.97 points, a breakout renders an SPX target at 5,522.5, intermediate-term.
One final point of interest to investors. Some investors tend to focus on the quarterly data to coincide with the release of quarterly corporate earnings. This quarter which began in Jan 2022 and ends in Mar 2022, is increasingly important. A quarterly close above last quarter's close (4,766.18) is favorable. However, a convincing surge above the prior quarter's high (4,808.93) and preferably above 4,818.62 (1/4/22 all-time high) confirms a positive outside quarter, which gives the market a much-needed bullish lift for the resumption of the structural bull.