A stock market bottom is often a process and does not necessarily develop overnight unless it is V-pattern bottom. S&P 500 Index is facing a crucial test as the benchmark index tests critical support near the mid-June and September 2022 lows.
How investors and traders react to those lows will help to determine whether the stock market resumes its primary downtrend or the start of another oversold rally.
So far, the results favor the bears as the primary downtrend remains intact, and the rolling over of moving averages warns of further downside.
As mentioned, a potential market bottom is a process comprising an oversold reading, a technical rally, a successful retest of the pivotal low, a technical basing effort, and a breakout.
A sustainable market bottom is the ability of the market to generate extreme oversold readings leading to oversold rallies. Successful retests of the lows can lead to technical bases and breakouts. Unsuccessful tests reaffirm the resumption of the primary trend, currently a downtrend.
SPX recorded a low of 3,636.77 on 6/17/22 and is currently retesting the summer low. Interestingly, despite the increase in volatility today, as SPX plummeted to an intraday low of 3,610.40, it closed at 3,640.47.
Although SPX has breached the mid-June 2022 low, a failed retest has to be decisive, often with multiple days or even weekly closes below the prior mid-June low. Sometimes, a violent break below a previous pivotal low signal a final capitulation phase to the selloff, prompting an equally explosive rally.
Nonetheless, a decisive close below the mid-June low warns of the resumption of the primary downtrend, possibly leading to the elusive extreme oversold readings common to most major market bottoms.
One final point worth mentioning. Potential divergences between market indexes, as evidenced by three (3) lower-low patterns (i.e., INDU, NYA, and SML) and three (3) higher-low patterns (i.e., COMPQ, NDX, and MID), should be closely monitored. Positive divergences often suggest a pivotal market turn or changes in market leadership.
In summary, SPX nears an inflection as it challenges the 6/17/22 low of 3,666.77. The outcome of this test may decide the next directional trend of US stocks. A successful test of the Jun lows via a flat to a higher high pattern can lead to a technical basing effort and another oversold rally.
However, a decisive breakdown of the Jun/Sept 2022 lows via a lower low pattern warns of the resumption of the January downtrend.
Regardless of whether the mid-June low is the final market bottom, any rallies tomorrow or next month, or toward year-end, are bear market rallies until proven otherwise.