What does the expression this time around is different mean?
Does this imply that what has happened before will not happen again?
Is the stock market rout today another wake-up call for investors to be cautious ahead of the next down leg?
Or will it be different this time around?
Let us review the technical tape to determine the likely market scenario for the S&P 500 Index (SPX).
The 10/13/22 to 12/1/22 SPX oversold rally has been impressive, gaining 608.93 points or 17.44% in 34 trading days. It compares favorably to the previous 6/17/22 to 8/16/22 oversold rally of 688 points or 18.93% in 40 trading days.
The pertinent question remains - is the 10/13/22 rally another oversold rally?
A review of the daily chart of SPX shows similarities and differences between the Jun-Aug and Oct-present oversold rallies.
Similarities include (1) bullish gap-ups and positive outside days, (2) successful rebounds from oversold levels (RSI at 30) and price momentum lows (MACD greater than -100), (3) rising wedges, (4) testing of the 200-day moving averages, (5) testing the primary Jan 2022 downtrends, (5) three consecutive days of selling toward the end of the respective oversold rallies, (6) extreme spread develop between the 50-day and 200-day ma, (7) 50-day ma rising and 200-day ma declining, and (8) advance-decline market breadth trendline breakdown toward the end of the oversold rallies.
Differences include (1) seasonality factors not the same as the prior summer rally encountered a seasonal weakness period (Sept/Oct) while the current rally remains in a seasonal strength period (Nov/Dec/Jan), (2) the current oversold rally does not appear to be as steep as the previous summer 2022 rally, (3) the distance between the last sale price to the 50-day ma is not as far apart, (4) the prior rally did not surpass the 61.8% retracement and the current rally did briefly exceed the 61.8% retracement, (5) and the prior rally cleared the reaction high (6/2/22 reaction high at 4,177.51) but not on the current rally (8/16/22 reaction high at 4,325.28).
So, what does this all mean?
The first three days of trading in December strongly suggest another impending inflection point. It is unclear if this is a consolidation with further upside or yet another market top.
The pullback over the next few days to weeks will help to decide the next SPX directional trend.
If this is market top, negative daily reversal patterns such as negative outside days, gap-downs, or island reversals will soon appear on the daily charts.
Also, the pullback will be weak as SPX fails to hold onto initial support, coinciding with the bottom of the rising wedge (3,985) and below this secondary support near the 11/10/22 breakout (3,907-3,912) and medium-term support along the 11/10/22 gap-up (3,818-3,860) and the 50-day ma (3,818).
On the other hand, if this is consolidation rather than a market top, then SPX will find support near its 38.2% retracement (3,868) from Oct-Dec 2022 rally and maintain above the critical 50-day ma (3,818) on subsequent market pullbacks.
Failure to find support opens the door for another deep correction toward the 50-61.8% retracements (3,796/3,724).
The Sept/Oct 2022 reaction lows at 3,584/3,491.58 remain crucial support. A breakdown below the prior lows confirms the resumption of the Jan 2022 primary downtrend as SPX retests longer-term support at 3,195, corresponding to the 61.8% retracement from the Mar 2020-Jan 2022 rally.
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