September is one of the weakest months of the year for stocks, at least from a seasonality perspective. The market weakness over the past few weeks may be due to many factors, including geopolitical, rising rates, continued inflation, Fed rate hikes, and the QT withdrawal of $95 billion in liquidity from the system. Fear and bearish market sentiments are increasing as the market nears oversold levels.
The S&P 500 Index (SPX) is moving toward near-term oversold conditions as the daily RSI overbought/oversold indicator (33.63) declines toward 30, implying another short-term technical bounce. However, the intermediate-term weekly RSI chart (42.20) is trading at a neutral zone, suggesting that the market can decline further before achieving oversold levels.
One caveat worth mentioning, oversold markets in primary downtrends differ from oversold markets in primary uptrends. The former can stay oversold for far longer than expected, prolonging the decline.
SPX Daily Chart
The 6/17/22 SPX oversold summer rally failed at 4,325.28 (8/16/22) or near 4,286-4,367 or pivotal intermediate-term resistance, coinciding with the 200-day ma (4,286), top of the Jan 2022 downtrend (4,315), and the 61.8% retracement (4,367 from the Jan 2022-Jun 2022 decline).
The gap-down on 8/22/22 and 8/26/22 negative outside day ignited another correction that broke below the crucial 50-day ma (4,020). The bearish actions open the door for an SPX decline to critical support, corresponding to the Jun 2022 uptrend (3,905), the 68.2% retracement from the Jun-Aug 2022 rally (3,900), and the extension of the Mar 2022 downtrend (3,840).
The daily RSI indicator (34.18) nears oversold readings (30) and the pivotal Jan 2022 uptrend. Can the short-term OB/OS indicator find support here? Will this trigger another short-term SPX oversold rally?
Below this support opens the door for a decline to 3,810-3,817 (May 2022 low and 7/15/22 gap-up) and 3,637-3,721.5 (Jun/Jul 2022 reaction lows).
Initial resistance falls to 4,018-4,020 (9/2/22 high and 50-day ma) and above this 4,177.5-4,203 (6/2/22 high and 8/26/22 negative outside day high), and 4,286-4,325 (200-day ma, top of the Jan 2022 downtrend channel, and the May/Aug 2022 reaction highs).
SPX Weekly Chart
A descending broadening wedge has developed in SPX over the past year. Two diverging trend lines typically signal the potential for a bullish trend reversal. The upper trendline (4,298) offers critical resistance. The lower trendline provides pivotal support. A move above 4,298 confirms break out.
The weekly RSI indicator (42.41) is trading at a neutral level. RSI will need to decline to the low-30s and possibly lower before generating an oversold reading.
Failure of SPX to surpass the upper trendline (4,298) warns of a decline toward the bottom of the trendline (3,293). Pivotal support also converges near 3,105-3,505, coinciding with the 50-61.8% retracements (3,505/3,195) and the Aug 2020 V-pattern breakout (3,393.5).
Will SPX finally achieve a bottom here?