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SPX Breakout or a Top?

After suffering two (2) large back-to-back gap-downs during 6/10 and 6/13/22 and declining 1,181.75-points or 24.52%, SPX reached a low of 3,636.87 (6/17/22).


A deeply oversold condition (RSI at a low 30 on 6/17/22) and positive divergence in the MACD price momentum indicator prompted the SPX summer rally.


The impressive rally has recorded five (5) gaps ups, including 6/21, 6/24, 7/15, and 7/29, 8/10/22. In 39-trading days the index has appreciated 664.92-points or 18.28%. In the process, it has broken out above the 50-day ma (3,955.08), the 150-day ma (4,212.00), and the 30-week ma (4,188.65).


Although the volume has been light during the summer months and the relative strength of SPX versus Wilshire 5000 Index remains in a flat-to-sideways trending mode, two crucial technical indicators recorded breakouts, including the cumulative advance-decline line or market breadth and the MACD price momentum, are constructive.


A third pivotal technical indicator, RSI, also nears overbought levels (72.59). Although this is typically a bullish development, the primary trend since Jan 2022 remains in a downtrend, suggesting this remains an oversold rally rather than the start of a primary uptrend.


Nonetheless, the summer rally can continue for a while longer, possibly into the end of summer to early fall. Note that the RSI indicator climbed to a high of 77.78 in early-Nov 2021 as SPX records new highs until peaking at 4,818.62 (1/4/2022).


Will the SPX summer rally begin to fade as it nears formidable resistance at the 200-day ma (4,328), Jan 2022 primary downtrend (4,360), and the 61.8% retracement (4,367) from 1/4/22 to 6/17/22 rally)?


Unless this is a V-type pattern, a sustainable SPX bottom is a process that requires a period of backing and filling market action to confirm the bottom and the next sustainable primary bull trend.


Where can we expect SPX to find support on pullbacks?


Initial support is visible along the 150-day ma (4,212), 30-wk ma (4,189, not shown), and the 8/10/22 gap-up breakout (4,137-4,177.5).


Significant secondary support is available near the 7/20/22 breakout (3,946) and the 50-day ma (3,955). Violation here warns of a deeper SPX correction toward 3,829 (Jun 2022 uptrend) and below this 3,721.56 (7/14/22 higher-low), and then 3,636.87 (6/17/22 reaction low). A breakdown to lower low signals the next SPX selloff.


Source: Chart courtesy of StockCharts.com

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