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Stock Markets Pivot

As expected, the Fed raised interest rates by 75 basis points. The initial reaction to the Fed interest rate hike was a sharp rally in stocks and yields falling slightly lower. After further review, investors concluded the comments from Chairman Powell remain hawkish. Powell reiterated the Fed has more work to fight inflation, and there will be a lag between the tightening policies and the economy.


The market's consensus is that it is too premature to think the Fed will pause rate hikes. The decisive hawkish tone from the Fed soon led stocks to reverse direction, selling off into the close.


In hindsight, there were ample warnings ahead of a challenging day today.


For instance, a negative outside day quietly appeared in SPX yesterday (11/1/22) on the first trading day of a seasonality strong month (November). After briefly breaking out above the 50-day ma, SPX quickly reversed below the crucial moving average. SPX has also struggled to convincingly clear above the two previous negative outside days (6/28/22 at 3,945.86 and 3,907.07 – 9/21/22). The intraday high yesterday at 3,911.79 resembles a potential right shoulder to a complex 5-month head and shoulders top pattern.


Initial support rises to 3,647-3,721.5 (10/21/22 positive outside day low and 7/14/22 low) and below this 3,584-3,637 (Jun and Sept 2022 lows), and 3,491.58 (10/13/22 reaction low). Violation of 3,491.58 confirms the breakdown and warns of the resumption of the Jan 2022 primary downtrend and downside risks toward 3,200-3,300 or the bottom of the Jan 2022 downtrend channel and Sep/Oct 2020 lows.


INDU has led all markets from the 10/13/22 bottom, gaining 15.39% in 14-trading days and briefly surpassing its 200-day ma. Despite the near-term strength, the blue-chip average also generated a negative outside day yesterday (11/1/22). Another negative outside day (11/2/22) developed today. Two reversal patterns, coupled with failure to breakout above the crucial 200-day ma and the onset of a potential right (33,072 – 11/2/22) and left shoulder (33,272 – 6/1/22), warn of another top.


Although another rally is possible into the end of the year, a consolidation is likely over the near term. Initial support rises to 30,877-31,161 (10/24/22 gap-up, 9/6/22 low, and the 50-day ma) and below this to secondary support at 29,653-30,206 (Jun, Jul, and 10/21/22 positive outside day low). The Sept and Oct 2022 reaction lows at 28,661-28,716 remain pivotal support. Violation here warns of downside to 26,100-26,900 (bottom of the Nov/Dec 2022 downtrend channel and the Sept and Oct 2022 lows).


COMPQ remains one of the weakest indexes due to the heavy concentration of technology and growth-related names. A negative outside day yesterday (11/1/22) and failure to surpass key initial resistance at 11,210-11,230 (Oct/Nov 2022 highs and 50-day ma) warn of another decline.


Initial support is 10,542-10,572, coinciding with the 10/21/22 positive outside day low and the Jun and Sept 2022 lows. Below this to 10,088.83 or the 10/13/22 reaction low. Violation of 10,088.83 warns of a decline toward 9,838 (Jun 2020 V-pattern breakout).


We may not have witnessed the high point as the seasonal strength period can bring another Christmas to year-end rally. However, the bearish conditions over the past few days suggest the 10/13/22 oversold rallies have run their course. Mid-term elections next Tuesday may become the stock market's next pivot point.


Source: Courtesy of StockCharts.com

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