The S&P 500 Index (SPX – 4,330.00) has fallen 277.90 points or -6.03% from the recent 7/27/23 reaction high (4,607.07). Although the decline is unnerving, the market setback remains a typical market pullback (3-5%). After an impressive 3/13-7/27/23 rally of 798.21 points or 20.96%, it is reasonable to expect a correction to alleviate an overbought condition and consolidation period to reset the market before resuming the primary uptrend (Oct 2022). The seasonal stock market weakness also typically ends toward late September to early October.
An intermediate-term study of the SPX Index still suggests the primary uptrend remains intact, as evidenced by the primary Oct 2023 uptrend, currently rising near 4,250. The ability to find support here hints that this is a consolidation within a bull rally.
However, it is unusual to witness so many negative outside days (6) and gap-downs (3) within a relatively short time frame. See the daily SPX chart for further information. The nine daily reversal formations and the onset of a 3-plus month head and shoulders top pattern warn of continued selling pressures.
The selling over the past 5-days is nearing a critical stage, at least from a near-term perspective, as SPX tests the pivotal neckline support at 4,328-4,335. Also, the Jun 2023 breakout (4,325) and the critical 38.2% retracement (4,302) from the Mar-Jul 2023 rally) provide key support.
A near-term oversold condition has developed into a decline. The ability to find support along the neckline can also trigger a short-term technical rally. The key to a sustainable SPX recovery lies in the ability to clear resistances. Initial resistance falls to 4,375-4,401 (9/21/23 gap-down) and above 4,458-4,461 (Jun 2023 highs or left shoulders and the 8/24 and 9/20/23 negative outside highs), 4,481-4,514 (50-day ma, 9/14/23 high, and 7/27/23 downtrend), and 4,541-4,567.5 (the 9/1/23 negative-outside day high and the 8/2/23 gap-down).
Above 4,567.5 signals a retest of 4,607-4,626 (7/27/23 reaction high and extension of the Mar 2023 uptrend channel breakdown). A breakout above Jul reaction highs also negates the head/shoulders top distribution pattern and suggests a 278.99 points rally or an SPX target of 4,808.12 (Jan 2022 all-time high) and above this 4,886 (the head and shoulders top breakout projection).
On the downside, violation of 4,302-4,328 (neckline support, Jun 2023 breakout, and the 38.2% retracement from Mar-Jul 2023 rally) confirms a near-to-medium term market top and warns at SPX decline toward 4,250 (Oct 2022 primary uptrend and -7.75% from 7/27/23 high). Violation of primary uptrend warns of a drop toward 4,180-4,208 (-8.66% to -9.27%), coinciding with the May 2023 breakout, 200-day ma, 50% retracement from Mar-Jul 2023 rally, and 38.2% retracement from Oct 2022-Jul 2023 rally.
Intermediate-term support remains at 4,104-4,114 (-10.70% to -10.92%), corresponding to the 61.8% retracement from Mar-Jul 2023 rally, Feb 2023 breakout, and the 4/25/23 bullish island reversal low, and below 4,049-4,056 (-11.96% to -12.11%) or the Apr/May 2023 lows, 50% retracement from Oct 2022-Jul 2023 rally, and the head/shoulders top breakdown projection.
Under strong selling, SPX can retrace its entire Mar-Jul 2023 rally and retest the Mar 2022 reaction low at 3,808.86 (-17.33%).