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Stock Market Inflection Point

Updated: Jan 24

The stocks fell today as concerns surrounding rising inflation, higher interest rates, and Fed’s hikes dominate headline news. Nasdaq Composite Index (COMPQ) lost another 1.15% to 14,340.26, moving deeper into correction territory (10%-plus) for the first time since March 2021. The Dow Jones Industrial Average (INDU) fell 0.96%, finishing the day at 35,028.65. The S&P 500 Index (SPX) also declined 0.97%, led by weakness from the S&P Consumer Discretionary sector (XLY -1.80%), Financials (XLF -1.68%), and Technology (XLK -1.40%).


The Fed will meet next week in the next FOMC meeting. Many will be listening intently to the messaging from Fed Chairman Powell as the central bank normalizes its monetary policy and interest rates. Investors will also closely scrutinize companies releasing their fourth-quarter earnings, with many mega-cap Technology earnings starting next week.


Markets are becoming increasingly volatile, a potential sign of an impending inflection point as investors begin to digest a new stock market environment as the Fed looks to tighten monetary conditions and control rising inflation. While the intermediate-to-longer term trend remains constructive, the near-term outlook will likely remain choppy and erratic.

Below is a technical outlook of the S&P 500 Index over the near-term to intermediate-term time horizon. Pay close attention to key near-term and intermediate-term technical levels for guidance as for the next technical trends.


SPX Short-term Technical Outlook:

The market volatility over the past two months is either a consolidation within a primary uptrend or the start of a deep and more extensive correction.


A potential head and shoulders top pattern and mixed readings from the technical indicators suggest a near-term inflection point is near.


Neckline support coinciding with the Dec 2021 lows (4,495.12/4,531.10) is near-term support. The ability to find support here can lead to another rally initially to the 50-day ma (4,675.66) and above this to 4,732-4,748 (left/right shoulders), and 4,818.62 (1/4/22 all-time high). A breakout above 4,818.62 negates the head/shoulders top and confirms the resumption of the primary uptrend, suggesting the next rally to 4,925 (top of the Mar 2021 uptrend channel) and above this 5,142 (head/shoulder top breakout target).


However, on the downside, violation of the neckline support coupled with violations of the 200-day ma (4,425.62) and the 38.2% retracement (4,400.22) from Mar 2021 to Jan 2022 confirms a technical breakdown. The breakdown hints of a deeper correction toward 4,271-4,279 (50% retracement and Oct 2021 low), and a below this to 4,142-4,172 (61.8% retracement and the head/shoulders top downside target).


SPX Intermediate-term Technical Outlook:


The Jan 2022 SPX correction of 288.42 points or -5.99% has led to the violation of the 50-day ma (4,675.66) and Mar 2021 uptrend (4,587). The near-term technical breakdown and weakening market internals warn of further market volatility.


Despite the breakdown and weak technical conditions, the SPX Index is trading above its 12/3/21 low (4,495.12) and the pivotal 200-day ma (4,425.62). Nonetheless, an inflection point is near, and the outcome will determine the next SPX trend.


A successful test of support signals the resumption of the primary uptrend. However, violation of 4,426-4,495 warns of a correction to the 10/4/21 reaction low (4,278.94) and the bottom of the 2020 uptrend channel (4,245 or -11.20% to -11.89%). Failure to maintain support opens the door for a deep and extensive correction to the 38.2% retracement (3,815.20) from March 2020-Jan 2022 rally to 3,815.29 or -20.82%. A breakdown here can lead to a retest of the 50% retracement (3,505.24 or -27.26%) and below this to 61.8% retracement (3,195.28 or 33.69%).


On the upside, since the intermediate-to-longer term trends are rising, investors need to respect the primary uptrend. A convincing move above initial resistance near the 50-day ma (4,675.66) hints of recovery toward 4,744-4,749 (11/22/21 and 1/12/22 highs) and then 4,818.62 (1/4/22 record high). A new all-time high would signal the resumption of the bull rally.


Source: Charts courtesy of StockCharts.com

Source: Charts courtesy of StockCharts.com


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