The bears regain control
Bear market rallies are deceiving as they look like the start of a sustainable recovery. Failure to reverse the dominant downtrend traps buyers, creating a false sense of optimism. Bear declines are not linear. The rallies tend to be explosive but short-lived. Bear market rallies are head fakes or brief periods of optimism, driving prices up temporarily before the resumption of the primary downtrend.
For example, the granddaddy of bear markets during the 1929-1932 Great Depression structural bear market experienced one of the highest numbers of 5% to 10% bear market rallies. It also included five (5) 20% plus devastating bear market rallies.
While the mid-October 2022 rally has been impressive, and indexes such as the Dow Jones Industrial Average (INDU – 33,044.56) gained 21.11%, the S&P 500 Index (SPX – 3,898.85) rallied 17.45%, and COMPQ (10,852.27) recovered 14.45% of its losses, the bears remain in control. As long as the primary downtrend remains intact, any rally, despite being explosive and enticing, is a bear market oversold rally.
The fourth SPX oversold rally since the market’s top in January 2022 has failed to break out above pivotal resistance near the 1-year downtrend on 12/13/22 (4,100.96), suggesting the continuation of the bear trend. It is best to remain defensive and maintain a cautious stance in the stock market.
Although SPX seemed to have moved into a bullish mode when it crossed above its 200-day ma, the lack of follow-through to the breakout, coupled with a closed below the downward-slopping 200-day ma trend, confirms a failed break out, negating the potential for a trend reversal.
The failed breakout at 4,100.96 (12/13/22) and a subsequent lower-high at 4,015.39 (1/17/23) now act as formidable resistance. A convincing move above 4100.86-4,119.28 (Sept and Dec 2022 highs) signals the start of sustainable recovery.
Although there is still a chance of this trend reversal, it appears less likely each day SPX falls below its 200-day ma (3,971.92) and below the Jan/Mar 2022 downtrends (4,005-4,068).
The downside risk has increased as a result of recent market activities.
The failure to maintain initial support at the 50-day ma (3,925.66) warns of an SPX decline to secondary support at 3,764.49-3,810.32, coinciding with the May and Dec 2022 lows.
Violation here negates a higher low pattern and warns of a decline to the 61.8% retracement (3,724.36) from the Oct 2022-Dec 2022 rally and the prior Jul 2022 low (3,721.56).
A breakdown here can trigger a significant decline to 3,491.58 (10/13/22 reaction low) and below this to 3,428 (downside projection based on a 1-month technical base breakdown below the Dec 2022 low of 3,763.49), and 3,310-3,368 (bottom of the 2021/2022 downtrend channels).
Initial resistance is 3,925.5-3,972 (50-day and 200-day ma) and above this 4,005-4,068 (1/17/23 high and the Jan/Mar 2022 primary downtrends), 4,101-4,119 (Sept and Dec 2022 highs), and 4,325.28 (8/16/22). A breakout above 4,325.28 confirms a higher high and the start of the reversal of the 1-year downtrend.