The enclosed chart of the SPX Index (SPX – 4,701.21) suggests investors may be gearing up for another year-end rally. Consolidation is defined to be a market pullback between 3 and 5%. The 11/22/21 to 12/6/21 pullback of 248.71 points in 7-days was -5.24%, fulfilling another of the numerous consolidations/corrections this year.
It is also interesting that the volume expanded into the decline, suggesting heavy selling. The downturn may have spooked the speculative traders (i.e., weaker holders) out of the marketplace. At the same time, the VIX Index (VIX – 19.90) jumped from a low of 14.73 (11/4/21) to a high of 35.32 (12/3/21), further supporting the basis that fear was widespread.
The recent SPX setback is constructive from several technical perspectives.
First, the consolidation alleviated an overbought market condition (RSI traded to a high of 79 on 11/8/21) and possibly prevented the market from spiraling into a speculative bubble.
Second, the recent pullback tightened the large spread between the 50-day ma (4,559.30) and the 200-day ma (4,317.18). Although the spread is still 242-points, the two market pullbacks during September and November timeframes have helped close the gaps between SPX price and the two key moving averages. Remember, sustainable and longer-lasting bull trends, as well as favorable risk/reward, occur when SPX price is trading close to the 50-day and 200-day moving averages.
Third, the late-November 2021 decline came within striking distance of critical support at 4,456.5-4,559, coinciding with the 10/22/21 breakout, 50-day ma, and the 50-61.8% retracements from the 10/4-11/22/21 rally. The recent gap-up on 12/7/21 (4,612.60-4,631.97) and the ability to find pivotal support here hints of the springboard to the start of a year-end to earl-2022 rally.
Fourth, technical indicators including MACD, RSI, ADX, +DI, -DI, and Advance/Decline line have improved near-term. MACD indicator may be bottoming with a higher-low pattern. A positive cross confirms the start of rising price momentum. RSI Overbought/Oversold indicator (58.11) has successfully tested its oversold level (low-to-mid 30s) and can retest its Nov 2021 overbought levels in the low-to-mid-70s. The +DI trend is close to confirming a breakout above its -DI trend, signaling the next bullish uptrend. SPX/WLSH relative strength chart shows a channel breakout, suggesting SPX is likely to outperform the broader-based Wilshire 5000 Index. The Advance-Decline line has rebounded from its 50-day ma, offering signs of expanding market breadth. A breakout above the November 2021 high reaffirms broad market participation.
Fifth, a favorable risk/reward profile has developed from the recent 5.24% consolidation. Not only does this alleviate an overbought condition, but if the market were to succumb to negative news into year-end, the declines are manageable. Initial trading support rises to as high as 4,613-4,632 (12/7/21 gap-up), and below this to secondary support at 4,495-4,559 (12/3/21 low and the 50-day ma), medium-term support at 4,435 (bottom of the Mar 2021 uptrend channel), and pivotal intermediate-term support at 4,279-4,317 (200-day ma and 10/4/21 reaction low).
Based on the above technical conditions, the SPX Index can stage a nice year-end rally toward 4,743.83 (11/22/21 all-time high), and above this to 4,808 (top of Mar 2021 uptrend channel possibly by year-end), and then 4,992.5, into year-end or early next year.