Market rallies, but will they reverse their downtrends?
After two days of flat-to-down trading sessions, stocks ended near their highs today, shrugging off earlier weakness. Investors continue to focus on comments from the Federal Reserve officials and economic numbers, including tomorrow’s job report.
The Nasdaq Composite Index and Nasdaq 100 Index were the relative strength leaders today, gaining 2.69% and 2.75%, respectively. The S&P 500 Index and Dow Jones Industrial Average also rallied 1.84% and 1.33% into the close. Most S&P 500 Sectors closed up for the day, gaining from 0.67% to 3.06%. The S&P Energy Sector (XLE) was the only S&P sector down for the day, falling 0.32% into the close.
So, are the recent rallies the start of the next bull market?
Since the peaks in the listed markets in Jan 2022 and the over-the-counter markets in Nov 2022, the primary trends are downtrend channels. They are classified as oversold rallies until the downtrends reverse directions via trendline breakouts. The 5/20/22 rally may still have legs, sustaining over the next few days to a few weeks. The outcome of these rallies will help to decide the directional trends into the second half of the year. Trendline breakouts bode well for the resumption of the long-term uptrends. However, failure to convincingly surge above their respective downtrends may trigger the next market selloffs.
Below are technical updates to the S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), and Nasdaq Composite Index (COMPQ).
S&P 500 Index (SPX – 4,176.82)
The rebound from pivotal support at 3,810-3,837 (the bottom of the Jan 2022 downtrend channel, the 38.2% retracement from Mar 2020-Jan 2022 rally, 30-month ma, and the 61.8% retracement from Oct 2020-Jan 2022 rally) led to another oversold rally. Note that the two previous oversold rallies spanned 1-3 weeks (i.e., 1/24-2/2/22 rally +372.69 or +8.83% and 3/8-3/29/22 rally +479.43 or 11.53%).
The current 5/20/22-present oversold rally has appreciated 367.19 points or 9.64%. Above initial resistance at 4,062.5-4,091 (5/2/22 low and 5/17/22 high), and 4,115-4,158 (38.2% retracement from 3/29-5/20/22 decline and 3/8/22 low) suggests a rally to pivotal medium-term resistance at 4,195.5-4,256 (38.2% retracement from Jan-May 2022 decline, 50% retracement from Mar-May 2022 decline, and 50-day ma).
A breakout here renders a retest of 4,307.5-4,320 (5/4/22 high, 50% retracement from Jan-May 2022 decline, and the 61.8% retracement from Mar-May 2022 decline), and 4,433.5-4,513 (61.8% retracement from Jan-May 2022 rally, 200-day ma, 4/21/22 high, and Jan 2022 downtrend). A breakout above 4,500-4,513, coupled with a surge above 4,637 (3/29/22 high or the right shoulder), confirms an intermediate-term downtrend breakout, signaling a retest of the Jan 2022 all-time high (4,818.62).
SPX price momentum indicator appears headed toward a retest of its Jan/Mar 2022 highs, implying SPX can extend its oversold rally over the near term (next few days to a couple of weeks). The RSI overbought/oversold indicator (54.63) has cleared the neutral level (50), opening the door for an RSI rally toward the Mar 2022 high. SPX advance-decline line nears a critical near-term resistance at the top of the 6-month downtrend. A breakout confirms expanding the market breadth and signals the next SPX price rally.
Dow Jones Industrial Average (INDU – 33,248.28)
A well-defined downtrend remains intact between 30,100 and 34,934, suggesting the primary and prevailing trend is a downtrend. However, the ability of INDU to rebound from the bottom of its channel at 30,635.76 (5/20/22) has prompted another oversold rally. The rally has gained strength as it cleared initial resistance at 32,272.5-32,689 (38.2% retracement from Apr-May 2022 decline, 2/24 and 3/8/22 lows, and 5/17/22 high), and 33,049-33,150 (38.2% retracement from 1/5/22-5/20/22 decline, 50% retracement from Apr-May 2022 decline, and 1/24/22 low).
The next challenge for INDU is to break out above medium-term resistance at 33,528-34,118 (61.8% retracement from Apr-May 2022 decline, Oct/Dec 2021, and 4/12/22 lows, 50-day ma, 50% retracement, and 5/4/22 high). A breakout renders a retest of intermediate-term resistance at 34,539.5-34,934 (12/20/21 low, 61.8% retracement, 200-day ma, and top of the Dec 2021/Jan 2022 downtrend channel). Above 34,934 coupled with a surge above 35,492-35,824 (Feb/Apr 2022 highs or the right shoulders) negates the downtrend and signals a retest of 36,952.65 (1/5/22 all-time high).
The INDU price momentum indicator has rebounded from the bottom of its Nov/Dec 2021 downtrend channel on 5/20/22. The sharp rebound suggests a retest of the top of the downtrend channel. It is constructive the RSI indicator (55.16) has cleared above 50 (neutral zone) as this signals a recovery to the Jan-Apr 2022 highs (the low-to-mid 60s). INDU nears the top of its Jan 2022 market breadth downtrend. A breakout confirms expanding the market breadth and hints at a medium-term INDU price recovery.
Nasdaq Composite Index (COMPQ – 12,316.90)
Violation of neckline support at 12,397-12,587 (Mar 2021 and Feb/Mar 2022 lows) confirmed a COMPQ top. Also, violation of the bottom of the Oct 2021 downtrend channel (11,538) warns of further volatility. Initial support remains at 11,036-11,109 (5/12 and 5/20/22 pivotal lows). The ability to find a rebound from support coupled with an oversold condition signals another oversold rally to initial resistance at 11,988-12,202 (5/2/22 low and 5/17/22 high) and above this 12,414-12,588 (38.2% retracement from the Mar-May 2022 decline, 4/29/22 breakdown, and Feb/Mar 2022 lows).
A breakout helps sustain the oversold rally toward 12,811-13,265.5 (50-61.8% retracement from Mar-May 2022 decline, 38.2% retracement from Nov 2021-May 2022 decline, 5/1/22 high, Feb 2022 breakdown, and 50-day ma).
A breakout here is technically significant as this confirms a medium-term rally to 13,624-13,837.5/13,952-14,096 (3/3 and 4/21/22 highs and 4/6/22 gap-down/top of Jan 2022 downtrend), and 14,235-14,647 (61.8% retracement from Nov 2021-May 2022 decline, Feb/Mar 2022 highs, top of the Nov 2021 downtrend channel, and the 200-day ma).
Daily MACD price momentum has bottomed on 5/12/22, prompting a technical rally. The challenge is to breakout above the top of the Nov 2021 downtrend channel to confirm the 11/23/22 price low as a near-term bottom and prolong the Nasdaq price recovery. The daily RSI indicator (53.60) has rallied from the oversold readings (30) and has recently surpassed its crucial neutral zone (50). The ability to breakout above 50 can extend the oversold rally toward the Mar 2022 high (64).