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Summer rally continues but to where and for how long?

As we move into the dog days of summer, investors’ moods are holding up better than the hot, humid, and sultry weather. With inflation remaining stubbornly high, recession fears intensifying, and the Federal Reserve hiking rates to curb inflation, one would expect investors to go on vacation and stay until accommodating weather returns in early fall.


The summer doldrums that typically occur every summer may not come this year because stock market indexes have suffered devasting cyclical bear declines, with 20% drops or more in the past six to eight months. The fierce selling has created an oversold market condition, prompting oversold rallies, including the most recent on 6/17/22. The fourth technical bounce this year, at least for the SPX Index, has produced 362.42 points or a respectable 9.97% gain over the past month.


Is this the beginning of the next bull run or another oversold rally?


The intermediate-term trend remains negative for SPX, as evidenced by the Jan 2022 primary downtrend (4,402) and the declining 200-day ma (3,357).


However, on a near-to-medium term basis, SPX is technically improving, evidenced by the recent bullish developments. The breakout above its Apr 2022 downtrend (3,892) on 7/18/22 hints at a near-term bottom. Trading above the 50-day ma (3,919.83) for the first time in two months and surging above the previous 6/28/22 reaction high of 3,945.86 on 7/20/22 reinforce the summer rally. The three gap-ups (i.e., 6/17, 6/24, and 7/15/22) are constructive, and a higher-low pattern (7/14 and 6/10/22 lows) suggests the 6/17/22 SPX oversold rally has more legs.


So, where is strong resistance?


Despite the above developments, there remain overhead resistances. Key initial resistance resides at the 6/10/22 gap-down at 3,974-4,017, 38.2% retracement (4,019) from Mar-Jun 2022 decline, and the Mar 2022 downtrend at 4,065.


The ability to convincingly breakout above 4,017-4,065 can extend the summer rally to 4,225 (the 7/20/22 breakout projection and the 61.8% retracement from Mar-Jun 2022 decline). If SPX achieves this projection, the 17% rebound from the Jun 2022 low would be impressive, given the sharp setbacks during the first half.


Under bullish market conditions, SPX can rally to formidable intermediate-term resistance at 4,357-4,402 (200-day ma and Jan 2022 downtrend) during late summer to early fall. The optimistic 21% move from the Jun 2022 low would require an ideal market environment (i.e., inflation receding, recession fears subsiding, and hard landing concerns abating).


The caveat to a sustainable summer recovery remains the ability of SPX to maintain support during consolidations. The initial trading support rises to 3,892-3,920 (extension of Apr 2022 downtrend and the 50-day ma). Secondary support is the 7/15/22 gap-up (3,796-3,817), and below this 3,721.5-3,752 (Jun 2022 uptrend and 7/14/22 higher low), and 3,636.87 (6/17/22 reaction low). Violation of 3,637 warns of the next SPX selloff toward 3,200-3,400.


On another note, US stock market indexes, including INDU, NYA, COMPQ, NDX, MID, SML, and IWC, have recorded short-term technical breakouts above their respective Apr 2022 downtrends and 50-day ma.


Like SPX, their primary trends from Nov 2021 and Jan 2022 all-time highs remain in well-defined downtrends, suggesting these are oversold rallies and not the start of longer-term bull trends.


Source: Chart courtesy of StockCharts.com

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