After a strong January, all three US indexes closed out February with monthly declines. For the month, the S&P 500 Index declined 2.61%, the Dow Jones Industrial Average fell 4.19%, and the Nasdaq Composite Index dropped 1.11%.
Earlier in the year, many expected the Fed to pivot, pause, or cut rates sooner than the Fed was suggesting. However, the recent economic numbers and comments from the Fed officials prompted many investors to reassess the Fed’s tightening policies and question the odds the central banks would continue to hike rates and keep them at elevated levels longer than expected.
Today, the reading from the consumer confidence showed an unexpected decline in February, and another gauge of home prices continues to fall in December.
The recent pullback in SPX near the downtrend line and the 50-day and 200-day moving averages confuse traders and investors. As noted in yesterday’s blog titled - Higher Low and Higher High, another inflection is upon us. A successful test of support reaffirms a higher low and higher high pattern. Failure to maintain support, coinciding with the 50-day ma (3,979), the 200-day ma (3,940), and the extension of the January 2022 downtrend (3,974) will lead to a retest of the crucial higher-low (3,764,49 – 12/22/22). A breakdown here negates a higher low pattern and warns of a decline toward 3,491.58 (10/13/22 reaction low).
The bulls and bears are converging toward another crucial battle. The outcome of this battle will help to decide the next SPX directional trend.
The bears see the recent consolidation as a bear market rally within a primary downtrend. They point to a large SPX monthly bearish flag/pennant formation developing to suggest this is a continuation pattern. A violation of the bottom of the pennant/flag below 3,785/3,839.50 and 3,585.62 warns of significant downside risks.
The bulls see a potential bottom developing via a large head and shoulders bottom. The head is 3,491.58 (10/13/22 low). The left shoulder is the 3,636.87 (Jun 2022 low). The right shoulder is 3,764.49 (Dec 2022 low). The neckline resistance resides near the May/Aug 2022 highs at 4,308/4,325.
Although the bullish base has yet to break out, the bulls are optimistic that this will occur. A monthly close above 4,076.60-4,130.29 (Jul/Nov 2022 and Jan 2023) highs confirms the head/shoulders bottom breakout and suggests +544.67 points for an SPX target at 4,675-4,766.
Although the bulls and bears both believe they are correct. However, is there a chance that neither is right?
After reviewing the two monthly charts, there appears to be no clear winner. The stock market is mixed or neutral. It may be wise to be patient and sit on the sidelines until a decisive winner emerges from the impending battle.