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SPX pullback before the next bull rally?

The S&P 500 Index finished lower today as it posted its third straight day of losses. After the weak ADP November payroll job numbers (103,000 new jobs in November reported versus 128,999 consensus forecast), investors feared the slower hiring and softer U.S. labor market warned of an economic slowdown.


Investors will now turn to the closely watched and comprehensive U.S. Bureau of Labor Statistics employment report later in the week for clues as to the state of the economy and whether the Fed will adjust the soft-landing narrative on the next FOMC meeting on Dec 12-13, 2023. Many expect the Fed to hold the rate steady at a target range of 5.25%-5.50%. Markets are now pricing a 60% chance of a Fed rate cut as early as March 2024.


The expectation of a soft landing, lower interest rates, and hopes that the Fed will cut rates next year has supported the recent rally in stocks and bonds. Although stocks can still trend higher into the end of the year, the explosive runup from late October has created another overbought market condition.


Some of the SPX technical indicators are flashing short-term sell signals. For example, the advance minus decline downtrend channel breakout in Nov 2023 has led to a sharp rally toward the Jul 2023 peaks. However, the recent failure to surpass the Jul 2023 highs warns of a possible pullback.


The VIX implied volatility index has touched the Jun/Sept 2023 lows, suggesting a potential bounce toward the mid-to-high teens. The MACD price momentum indicator also shows a crossover, signaling a near-term momentum peak. The RSI overbought/oversold indicator hovered near the low-to-mid 70s during late November before declining toward 62.81 (12/6/23), signaling the risk of a short-term pullback toward key support near the neutral level (50s). The +DI trend is trading too far above the -DI trend, suggesting a contraction in the spread and a short-term SPX decline.


On the daily charts, SPX swung between losses and gains on Wednesday but declined into the close. U.S. stocks ended down, negatively impacted by mega-cap and energy shares. A negative outside day has quietly appeared. The short-term daily reversal pattern warns of the potential for a near-term pullback.


Where will SPX find support?


A near-term overbought condition, weakening technicals, and negative outside day pattern warn of an SPX pullback. Initial support rises to 4,512-4,541 (mid-Nov 2023 breakout and Sept 2023 highs). Violation here warns of the start of a pullback toward pivotal secondary support at 4,411-4,459 (11/14/23 gap-up and the 38.2% retracement from 10/27/23 to 12/1/23 rally). A strong bull rally or robust market tends to find key support near the 38.2% retracement, prior breakout level, and 50-day ma.


Below this support, warns of a decline toward 4,374.5-4,393.5 (early-Nov 203 breakout, extension of the Jul 2023 downtrend breakout, and the 50-day ma) and below this to crucial support at  4,293-4,335 (6/26 and 8/18/23 lows, the 61.8% retracement, 11/3/23 gap-up, and the 200-day ma).


Violation of the 200-day ma is bearish as this warns of a deeper correction toward 4,216.5-4,268 (10/3/23 low and the 11/2/23 gap-up) and below 4,195-4,198 (11/1/23 gap-up and May 2023 breakout), and 4,103.78 (10/27/23 reaction low).


How high can SPX rally to in 2024?


On a positive note, since Jul 2023, a potential head and shoulders bottom pattern may develop. Failure of SPX to clear above key initial resistance at 4,599-4,607 (Jul and Dec 2023 highs) defines the potential neckline. To create symmetry to the h/s bottom pattern, SPX still needs to establish a right shoulder(s), preferably above the existing left shoulders at 4,328-4,335 (6/26 and 8/18/23 lows) and 4,216.5 (10/3/23 lows). Since the head is 4,193.78 (10/27/23), this would imply that 3-4 months may be required to establish the right shoulders, suggesting the end of the first quarter of 2024 before completion of the bottoming pattern. A neckline breakout above 4,599-4,607 suggests 503.29 points, rendering an SPX target of 5,114.36 next year.



Source: Chart courtesy of StockCharts.com


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