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Suspicious Minds and Suspicious Rallies?

Updated: Nov 12, 2023

In the 50 years after the release of “Suspicious Minds,” it remains one of Elvis Presley‘s most famous number 1 hits. The timeless song was written by Mark James and based on James’s personal experience of a love triangle. James’ wife was suspicious of him having feelings for his childhood sweetheart. The song captures the mistrust between the three parties with the haunting and mesmerizing lyrics “caught in this trap that they could not walk out of.”


Interestingly, the recent stock market rally hints at a suspicious rally, resembling a market short squeeze. The oversold rally in the past week may be the direct result of short-selling activities rather than underlying changes in fundamentals or economic conditions. A short squeeze occurs when demand suddenly increases relative to supply as short sellers buy back stocks to cover their short positions.

Since the late July 2023 SPX peak (4,607.07), a well-established 4-month downtrend channel remains between 4,125 and 4,427. SPX nears pivotal resistance at 4,376-4,427 corresponding to the 9/21/23 gap-down, Oct 2023 highs, 61.8% retracement from the Jul to Oct 2023 decline, and the top of the Jul 2023 downtrend channel.


Whether SPX can reverse the primary downtrend above 4,427 will help decide if this is a suspicious oversold and short-covering rally or the start of another year-end to early 2024 rally.


If this is an oversold or a bear market rally, then sellers will reemerge near formidable resistance at 4,427 to take advantage of shorting the market.


On the daily charts, heavy volume also developed between 4,430 and 4,475, suggesting previous strong buying and selling activities. Watch this area as it may become formidable resistance on subsequent SPX rallies. Also, note that the top of the Bollinger Bands hovers near 4,447.63 providing supply. The band is extremely wide and is not likely to sustain at the current pace.


On a positive note, the three consecutive gap-ups from last week (9/1, 9/2, and 9/3) and the development of a short-term flag/pennant formation hint at bullish developments. Since the height of the pole to the flag/pennant pattern is 282.48 points, a breakout above the top of the pole at 4,386.26 (11/7/23 high) and preferably above the top of the Jul 2023 downtrend channel (4,427) signals a year-end to early 2024 rally to 4,607.07 (7/27/23 negative outside day high) and above this 4,669 (flag/pennant breakout projection).


The ability of SPX to maintain above the 50-day ma (4,345.74) helps to solidify the flag/pennant pattern. On the other hand, a violation of the 50-day ma and a subsequent decline below the 11/3/23 gap-up (4,319.72-4,334.23) may negate the bullish formation.


A confirmed breakdown warns of a pullback toward secondary support at 4,245.64-4,268.26 (11/2/23 gap-up and 200-day ma) and below 4,195.55-4,197.74 (9/1/23 gap-up) and 4,104-4,120 (10/27/23 low and the bottom of the Jul 2023 downtrend channel).


A lower-low warns of the resumption of the Jul 2023 primary downtrend.


Source: Chart courtesy of StockCharts.com

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