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Is SPX headed toward 2,900 or 5,200?

Is the SPX mid-October 2022 low of 3,491.58 a bottom and the resumption of the May 2013 structural bull rally toward 5,200?

Or is this start of a decline that brings SPX to 2,900?

Escalating geopolitical tensions continue in Europe and Asia. Recession and inflationary pressures remain. Interest rates threaten to climb higher as the Fed remains hawkish.

The above conditions have led to SPX declining 1,327.04 points or 27.54% over the past ten months, placing the decline firmly in bear market territories.

Is enough bad news already priced into the decline? Or is there another shoe to drop that sends SPX much lower?

The market will do whatever it wants to do and will continue to confound the majority of investors.


So, what does history tell us about SPX?

Historically, when SPX declines more than 25%, it leads to excellent buying opportunities. For instance, since 1950, the bulk of all SPX bear declines are cyclical bears, resulting in the resumption of the existing structural bull or transition into the next secular bull.

SPX's cyclical bear decline from Feb-Mar 2020 of -35.41%, although quite painful, resulted in the resumption of the May 2013 structural bull. From the Mar 2020 pandemic bottom of 2,191.86, SPX rallied 54.82% over the next 5-months to retest its Feb 2020 prior all-time high. A subsequent V-pattern breakout in Aug 2020 reaffirmed the resumption of the structural bull resulting in 119.84% gains as SPX rallied to the Jan 2022 record high.

However, there have been three occasions when the 20%-plus bear decline did not lead to the resumption of the structural bull but transitioned toward a structural bear market, leading to 50% SPX declines. For example, the two bear markets, including the 2000-2002 Tech/Telecom dot.com bubble and the 2007-2009 Global Financial/Great Recession, resulted in SPX bear declines of 50.51% and 57.69%.

Which of the two scenarios is likely to occur?

SPX remains a primary bear market since the Jan 2022 primary downtrend remains down. Until a reversal of the downtrend above 4,160-4,200, it remains a challenging cyclical bear market decline.

However, the 9-year bull trend that began in earnest in May 2013 via a breakout above 1,533-1,576 remains intact, suggesting the dominant and prevailing longer-term trend continues to be a secular bull.

History suggests Jan 2022 to the present bear market decline may be another cyclical bear decline.

Nonetheless, a convincing move above the Jan 2022 primary downtrend at 4,160-4,200 and the ability to surge above the converging 10-month (4,035) and 30-month (4,003) moving averages can reverse the primary downtrend and allows for the resumption of May 2013 structural. Under this scenario, SPX can retest the 1/4/22 high at 4,818.62 (+38% gains) and above this to 5,211 (+49% gains).

It is also worth reviewing the convergence of the two monthly moving averages. The last time the 10-mo ma and 30-mo ma contracted sharply was during Jun 2016, coinciding with Chinese hard landing fears, commodities collapse, US recession concerns, and Brexit.


The 10-mo ma soon reversed direction and proceeded to trend higher, averting a monthly death cross-sell signal and the resumption of the May 2013 structural bull.


If we fast forward to 2022, a sharp contraction between the 10-mo and 30-mo moving averages warns of an inflection. Although economic and market conditions are different from before, they are strikingly similar.


Will a successful test of the 10-mo ma against the rising 30-mo ma also trigger the resumption of the May 2013 structural bull?

History also suggests Jan 2022 to the present bear market decline may be the start of a structural bear or trading range trend.

To confirm the transition toward a long-term bear trend, SPX must violate the Oct 2022 low (3,491.58) and the middle of the 2009 uptrend channel (3,564). A monthly death cross-sell signal signals a decline to 3,195 (-33.7%) or the 61.8% retracement from Mar 2020-Jan 2022 rally. Below this to 2,912 (-39.5%) or the bottom of the 2009 uptrend channel.

Violation of the bottom of the 13-year uptrend channel and the 61.8% retracement reaffirms the next structural bear/trading range trend.


Source: Courtesy of StockCharts.com


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