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Proceed Carefully Until

Last Friday, Fed Chair Powell's Jackson Hole speech lifted sentiments across stocks. However, Powell mentioned the Federal Reserve would closely monitor incoming data and proceed carefully with further interest rate increases.

Although the end of summer is near, market participants will still need reassurance from the central bank that they will not hike interest rates in the September FOMC meeting. Until then, traders will tactically trade both sides of the market, navigating the uncertainties associated with the seasonality weakness period.

The next set of economic numbers that arrives on Thursday is the Personal Consumption Expenditures Index (PCE) or the Fed's preferred inflation measure, and on Friday, the US Department of Labor August Nonfarm Payrolls (NFP) job numbers.

The outcome of the two economic numbers can influence the US dollar, bonds, and stocks.

SPX has been on a rollercoaster ride over the past month. Is the tide turning, or is this another countertrend rally before the next down leg?

On a positive note, a third consecutive day of gains has pushed SPX above the 50-day ma (4,461.47) and the left and right shoulders (4,448.47-4,458.48/4,458.30) of a potential 3-month distribution top. A higher low pattern (4,335.31 – 8/18/23 and 4,356.29 – 8/25/23) and Jul 2023 downtrend breakout (currently at 4,419) hint at another SPX bottom.

On a negative note, three negative outside days (7/27, 8/4, and 8/10/23), 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 a retest of pivotal resistances. The negative outside day highs on 8/10/23 (4,527.37) and 8/4/23 (4,540.53) also act as formidable resistance.

In summary, the ability of SPX to break above the 50-day ma and the left/right shoulders bode well to negate the 3-month head and shoulders top pattern. However, the bulls need to follow through with the recent near-term breakouts.

A convincing surge above 4,503-4,567.5, corresponding to the 61.8-78.6% retracements, 8/10 and 8/4/23 negative outside days, and 8/2/23 gap-down, reaffirms the 8/18/23 low 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 signals the resumption of4,886.6 uptrend with the potential to retest the Jan 2022 all-time high (4,818.62) and above to 4,886.6 (head/shoulder top breakout above 4,607.07 projection).

On the downside, failure to break above 4,607.07 (7/27/23 reaction high) still warns of consolidation. Violation of neckline support at 4,328.08-4,335.31 (6/26 and 8/18/23 lows) and 4,302.15 (38.2% retracement from the 3/13 to 7/27/23 rally) confirms head/shoulders top breakdown and warns of a decline toward 4,049-4,208 (May 2023 breakout, 50-61.8% retracement from Mar-Jul 2023 rally, and the head/shoulders top breakdown target).


Source: Chart courtesy of StockCharts.com

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