The March 2023 rally may have stalled into the seasonal weakness period from late summer to early fall. However, does this imply that this is a market top and the start of another market selloff or consolidation within the October 2022 bull rally?
Fundamental Analysts value securities by evaluating financial ratios such as Price Earnings (PE) and Earnings Per Share (EPS).
Technical Analysts use technical indicators such as moving averages and others to help determine the extent and sustainability of a rally. One popular technical indicator is the distance from the moving average (DMA), which measures the distance (in percentage) above or below security from its key moving average (i.e., 50-day or 200-day). The objective is to determine the sustainability and momentum of the prevailing price trend.
Moving averages are lagging indicators that can help remove the noise and fluctuations in the market and uncover the underlying strength of a trend.
The distance from the moving average indicator (DMA) can identify (1) The primary trend (uptrend, downtrend, sideways trading range). (2) An overbought, neutral, or oversold condition. (3) An impending retracement, reversal, or continuation trend.
Since moving averages are lagging indicators, some believe it is useless. Yes, moving averages lag, but when deployed with other technical indicators (i.e., MACD and RSI) and different technical disciplines (i.e., pattern recognition analysis, trendline analysis, price breakout projections, and Fibonacci retracement), they can help.
Enclosed is a chart of the S&P 500 Index (SPX), overlayed with the 50-day and 200-day ma and the distance from the 50-day and 200-day ma indicators.
The SPX chart shows: (1) SPX is trading below its near-term Mar 2023 uptrend (currently rising at 4,592). (2) Above its October 2022 primary uptrend (4,239). (3) Marginally above its 50-day ma (4,481.74). (4) Comfortably above the 200-day ma (4,179.66). (5) The distance from the 50-day moving average (DMA) indicator just turned positive (0.52%). (6) The 200-day DMA is trading above the 200-day moving average at 7.79%. (7) 50-day DMA and 200-day DMA are both trending higher. (8) The spread (302.08) between the 50-day and 200-day ma remains wide.
So, what does this all mean?
The rising trends from the 50-day and 200-day moving averages suggest the directional medium-to-intermediate-term trends of SPX remain bullish. However, violation of the Mar 2023 uptrend in mid-August 2023 warns of a near-term breakdown prompting the near-term consolidation. The ability of SPX to stay above the rising 50-day MA and the positive 50-day DMA (0.52%) is technically constructive to rebuilding the technical base necessary to sustain the next bull rally.
Nonetheless, the distance from the 200-day ma (7.79%) remains at moderately overbought levels, and the spread (302.08) between the 50-day and 200-day ma needs to tighten further before a sustainable SPX bully rally. SPX must also maintain above the 50-day ma (4,481.74) and preferably surge above the 9/1/23 lower-high (4,541.25) and the extension of the Mar 2023 uptrend (4,592) to allow for the resumption of the uptrend.
There are five possible market outcomes:
Scenario 1 (bullish outlook): SPX maintains its 50-day ma (4,481.74) and surge convincingly above 4,541.25/4,592/4,607.07, reaffirming the 8/18/23 low (4,335.31) as a market bottom and ignites a year-end rally toward 4,818.62 (1/4/22 all-time high) as early as year-end and above this to 4,886 (3-month head and shoulders breakout target) early next year (2024).
Scenario 2 (moderately bullish): SPX maintains above initial support at 4,325-4,335 (Jun 2023 breakout and neckline) during the seasonality weakness period. A subsequent breakout above 4,607.07 triggers a year-end rally toward 4,637-4,749 (Nov 2021, 1/12/22, and Mar 2023 highs and the top of the Oct 2022 uptrend channel). Failure to surpass resistance prompts another consolidation.
Scenario 3 (neutral): SPX continues with its choppy sideways trading range, neither breaking out nor breaking down of its trading band between 4,328-4,335 (6/26 and 8/18/23 lows or neckline to 3-mo head and shoulders top) and 4,607.07 (7/27/23 high). The consolidation alleviates an overbought condition and sets the stage for a potential breakout (above 4,607.07) or breakdown (below 4,328-4,607).
Scenario 4: (moderately bearish): SPX breaks neckline support (4,328-4,335) and the 38.2% retracement (4,302) from Mar-Jul 2023 rally). The breakdown leads to a decline that maintains above pivotal intermediate-term support at 4,180-4,239 (200-day ma (4,179.66), May 2023 breakout (4,195.55), 50% retracement (4,208), and the Oct 2022 uptrend (4,239).
Scenario 5 (bearish): A convincing neckline breakdown below 4,328-4,335 triggers a sharp selloff that quickly violates intermediate-term support at 4,179-4,239 and the 61.8% retracement (4,113.5) from Mar to Jul 2023 rally. The strong selling leads to a retest of 3,764.5-3,808.52 (12/22/22 and 3/13/23 lows).