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Oversold rally but still a cyclical bear?

The dominant and prevailing SPX trend remains the Jan 2022 downtrend channel between 3,243 and 4,157.

Until reversal of the primary downtrend above 4,157 and preferably above the 200-day ma (4,064.5) coupled with a higher-high pattern above the 8/16/22 high (4,325.28), SPX remains in a cyclical bear.

Under this scenario, expect continued market volatility over the intermediate term (3-12 months).

Although SPX experienced extreme volatilities, they were not one-sided, as there were five (5) devastating market declines followed by four (4) explosive countertrend rallies this year.

The five (5) declines were from -10.46% to 19.28%, with an average loss of -13.48% in 22-days.

1/4-1/24/22 decline (14-days) from 4,818.62 to 4,222.62 or -596-points (-12.37%), 2/2-2/24/22 (16-days) decline from 4,595.31 to 4,114.65 or -480.66-points (-10.46%), 3/29-5/20/22 (38-days) decline from 4,818.62 to 4,222.62 or -596-points (-12.37%), 6/2-6/17/22 (11-days) decline from 4,177.51 to 3,636.87 or -540.64-points (-12.94%), 8/16-10/13/22 (42-days) decline from 4,325.28 to 3,491.58 or -833.70-points (-19.28%).

SPX also recorded four (4) rallies from 8.83% to 18.93%, with an average gain of +12.53% in 20-days.

1/24-2/2/22 (7-days) oversold rally from 4,222.62 to 4,595.31 or +372.26-points (+8.83%), 2/24-3/29/22 (23-days) rally from 4,114.65 to 4,637.30 or +522.65-points (+12.70%), 5/20-6/2/22 (9-days) rally from 3,810.32 to 4,177.51 or +367.19-points (+9.64%), 6/17-8/16/22 (42-days) rally from 3,636.87 to 4,325.28 or +688.41 (+18.93%).

Despite a well-established primary downtrend since Jan 2022, another potential cup and handle pattern has developed over the past three months.

A convincing breakout above 3,907-3,912 (9/21 and 11/1/22 highs) suggests +420.21 points or an SPX target at 4,332, or close to the 8/16/22 reaction high.

The caveat to this call remains two-fold. First, SPX must maintain support on pullbacks. The breakout at 3,907-3,912 is crucial initial support. The 11/10/22 gap-up (3,818-3,860) and 50-day ma (3,787) provide secondary support. 3,647-3,698, coinciding with the 10/21 and 11/3/22 higher lows, remain critical supports. Violation of a higher low warns of a return to the 10/13/22 bottom (3,491.58).

Secondarily, SPX needs to follow through with its breakout by quickly surging above the 200-day ma (4,064.5) and the top of the primary Jan 2022 downtrend channel (4,157). If history repeats itself, the favorable seasonality factors from November to early January should help SPX rally a little longer.

The fifth oversold rally from the 10/13/22 bottom (3,491.58) is one of the strongest countertrend rallies this year, as SPX has appreciated 15.39% over the past 27-days.

Will favorable seasonality lead to an SPX rally to the top of its downtrend channel (4,157)?

Can the breakout extend the 10/13/22 oversold rally to retest the 8/16/22 reaction high (4,325.28)?

If so, this will result in +23.88% gains, exceeding the explosive Jun-Aug 2022 rally of +18.83% in 42-days.

Source: Courtesy of

Source: Courtesy of

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