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Is this a pivotal week?

It remains challenging to call the exact market top or bottom. Also, pinpointing the time of the bearish or bullish reversal is difficult to project.

Since the July 2023 peak (SPX – 4,588.96), stocks have exhibited technical weakness, including a lack of market breadth, narrowed sector rotations, poor price momentum, and weak relative strength.

Although these technical signals warn of further selling, the price action is required to confirm a market top, a bottom, or key trend reversals.

Some traders believe that in a volatile market environment, one of the best ways to lower the noise and fluctuations in the marketplace is by using the line or last sale chart versus the typical bar chart (high, low, and close).

Line charts are one of the simplest and easiest charts to display price changes, showing the closing price or a single data point on the chart, hence the name.

Because line graphs are simple, it is easier for a trader or investor to compare the prices over a specified time. Because the line charts typically show closing prices, it may be easier for traders and investors to identify patterns, breakouts, breakdowns, and trend reversals.

Although the market actions over the past couple of weeks warn of more near-term downside risks, this week may be pivotal.

Why?

The end of the week, the end of the month, and the end of the third quarter occurs on Friday, September 29th. Many professional traders and money managers perform their monthly and quarterly portfolio adjustments. The window dressing of their portfolios into the end of the month and quarter will create added volatility, influencing the directional trends of the stock market, at least from a near-to-medium-term perspective.

The late July 2023 market pullback also nears an inflection point. The market actions at the end of the week/month can either confirm the recent market breakdown or signal the start of another stock market recovery. Further note, the end of September also coincides with the end of the seasonality weakness period and the beginning of seasonality strengths (i.e., October to January time frame).

A quick review of the line chart of the S&P Index (SPX – 4,337.44) suggests a 4-month triangle breakdown occurred on 9/20/23, as SPX breached the bottom of its triangle at 4,396. However, notice on the daily line chart that in early June 2023, SPX broke out above key resistance at 4,300-4,305 (May and Aug 2022 highs). The previous breakout now turns into pivotal support on pullbacks.

Also, the 38.2% retracement from the Mar-Jul 2023 rally is 4,309, providing critical initial support. The ability to find support above the 38.2% retracement signals a healthy consolidation, possibly leading to the resumption of the primary uptrend (Oct 2023).

However, a violation confirms the 4-month triangle breakdown and suggests a 260-point decline or an SPX target toward 4,136.

Typically, after the explosive 28% SPX rally from Oct 2022 to July 2023, it is reasonable to expect a normal pullback of the magnitude of at least 5-10%. SPX has managed to decline only 5.5% from its July 2023 closing high of 4,588.96.

Despite the increase in market volatility and many predicting the resuming of the prior bear market, SPX remains above the bottom of the Oct 2022 primary uptrend channel, now trending up at 4,256. SPX is also trading comfortably above the crucial 200-day ma (4,193), the May 2023 breakout (4,180), and the 61.8% retracement (4,136) from Mar-Jul 2023 rally.

Can SPX continue to sell off and continue with its downturn?

Sure, anything can happen at the end of the month, especially at the end of the quarter.

However, it will be interesting if SPX maintains above 4,300-4,309 by the end of the week.

Does this mark a market bottom and signal the start of another year-end rally?


Source: Chart courtesy of StockCharts.com

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