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Poor Start to September

The end of the summer and the beginning of fall tend to be volatile for stocks. The weak seasonality period and the uncertainties regarding the Fed hiking interest rates into the September FOMC meeting can lead to choppy trading over the next few weeks.

The economic numbers that may impact the financial markets are the jobless claims scheduled for release on Thursday, September 7th, and the inflation data from CPI and PPI next Wednesday and Thursday, September 13th and 14th.

SPX rallied strongly into the last week of August after suffering a sharp selloff earlier in the month. Is this the start of the next bull trend, or is this another countertrend rally that fades into the next downturn?

On a positive note, five of the seven days have witnessed SPX gains. The rally has enabled SPX to break above the short-term 7/27/23 downtrend (4,396), the 50-day ma (4,472.48), and the left shoulders (4,448.47/4,458.48) of a potential 3-month distribution top. Higher lows (4,335.31 – 8/18/23 and 4,356.29 – 8/25/23) hint at another SPX bottom.

On a negative note, five negative outside days (7/27, 8/4, 8/10, 8/24, and 9/1/23), 8/23/23 gap-down (4,550.93-4,567.53), and the 61.8-78.6% retracements (4,503.26-4,548.91) from 7/27/23 to 8/18/23 decline warn of formidable resistances. The negative outside day highs on 8/10/23 (4,527.37) and 8/4/23 (4,540.53) also act as resistances.

In summary, the ability of SPX to break above the 50-day ma, the left shoulders, and the 7/27/23 downtrend hints at the potential for a market bottom. However, the bulls must follow through with the recent near-term breakouts to solidify the 8/18 and 8/25/23 higher lows at 4,335.31 and 4,356.29.

A convincing surge above 4,503-4,567.5, corresponding to the 61.8-78.6% retracements, 8/10 and the 8/4/23 negative outside days, and the 8/2/23 gap-down, solidify the August 2023 lows as a pivotal bottom and allows for a retest of 4,607.07 (7/27/23 reaction high and the negative-outside day high). Above 4,607.07 reaffirms the resumption of the primary uptrend and a retest of the Jan 2022 all-time high (4,818.62), and above 4,886.6 (the head/shoulder top breakout target).

On the downside, a fifth negative outside day (9/1/23 – 4,541.25) and the failure to clear the top of the extension of the bottom of the Mar 2023 uptrend channel (4,546) warn of another right shoulder to the 3-month head/shoulders top. Also, failure to convincingly break out above 4,607.07 (7/27/23 reaction high) still warns of further SPX consolidation.

Initial support is 4,458-4,472.5 (8/24/23 negative outside high and the 50-day ma). Violation here warns of a retest of neckline support at 4,328.08-4,335.31 (6/26 and 8/18/23 lows). Below the 38.2% retracement from the 3/13 to 7/27/23 rally at 4,302.15 confirms the head/shoulders top breakdown and signals an SPX decline toward 4,049-4,208 (May 2023 breakout, the 50-61.8% retracement from Mar-Jul 2023 rally, and the head/shoulders top breakdown projection).


Source: Chart courtesy of StockCharts.com

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