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Three Market Scenarios

SPX ended its longest winning streak in two years as it closed down 35.43 points or -0.81%. Eight (8) consecutive days of gains ended after a poor Treasury debt auction and after Fed Chair Powell warned of higher interest rates needed to contain continued inflationary pressures.


Powell left the door open to leave rates the same next month but lifting rates higher next year if the economy and inflation do not slow down. Although pricing pressures have subsided this year, core inflation, excluding food and energy prices, trades at a 2.8% annualized rate, well above the Fed's 2% target goal. The U.S. economy also remains robust as the GPD expanded 4.9% this summer, driven by consumer spending, rising at the fastest pace since 2021, as consumers continue to spend and save less.


What does this mean for U.S. stocks?


Can SPX trade to 4,727, 3,809, or neither?


There are three possible scenarios for the end of the year and early 2014.


The primary trend from the Jul 2023 peak (4,607.07 – 7/27/23) remains the well-defined downtrend channel between 4,115 and 4,421. Failure of SPX to surge convincingly above pivotal resistance at 4,393.5-4,401 or the 9/21/23 gap-down and Oct/Nov 2023 highs, coupled with another negative outside day (11/9/23) warns of the next pullback. The outcome of the pullback will likely determine which of the three possible market scenarios is likely.


Scenario 1 (bullish) – A potential head and shoulders bottom has developed over the past two months. The left shoulder is 4,216.45-4,238.63, corresponding to the 10/3 and 9/27/23 lows. The head is 4,103.78 (10/27/23 low). The negative outside day (11/9/23) confirms the neckline at 4,393.5-4,401 (10/17 and 11/9/23 highs and the 9/21/23 gap-down). A lack of a right shoulder suggests a pullback still needs to occur. Symmetry in the head/shoulders bottom pattern requires SPX to maintain above the left shoulders (4,216-4,239) and preferably above the 200-day ma (4,255) and the 11/2/23 gap-up (4,245.5-4,268). Since it took 3-4 weeks to establish the left shoulders, a right shoulder should develop by late November to early December 2023. The key remains the ability to surge convincingly above the neckline at 4,393.5-4,401. A neckline breakout coupled with a breakout above the 61.8% retracement (4,415) and the top of the Jul 2023 downtrend channel (4,421) signals a sustainable SPX bull rally toward 4,607.97 (7/27/23 reaction high) and 4,683 (Oct 2023 head/shoulders bottom breakout target), and 4,727 (downtrend channel breakout projection).


Scenario 2 (neutral) – SPX remains confined to a sideways trading range into the end of the year and early 2024 as there is a lack of a catalyst to drive the market significantly higher or lower. SPX enters into a choppy and directionless trading environment, as defined by 4,104-4,115 on the downside (Oct 2023 lows and bottom of the Jul 2023 downtrend channel) and 4,393.5-4,421 on the upside (9/21/23 gap-down, Oct/Nov 2023 highs, 61.8% retracement from Jul to Oct 2023 decline, and the top of the Jul 2023 downtrend channel). The outcome of the trading range via a breakout or breakdown will help to decide the next SPX directional trend. Watch for the 50-day ma (4,340.10) to converge toward the 200-day ma (4,254.86), leading to either a death cross-sell signal (bearish) or a successful test of the 50-day ma rebounding from the 200-day ma (bullish).


Scenario 3 (bearish) – SPX weakens into the end of the year and early 2024 as geopolitical uncertainties, the Fed's monetary concerns, stubborn inflationary pressures, higher interest rates, lack of market breadth, and weakness in technology and growth stocks lead to the resumption of the primary downtrend. SPX convincingly breaks its 200-day ma, triggering a sharp decline toward the Oct 2023 lows (4,103.78) and the bottom of its Jul 2023 downtrend channel (4,115). However, the persistent selling continues as SPX violates the Oct 2023 lows and the bottom of the Jul 2023 downtrend channel (4,115). The breakdown ignites a sharp sell-off toward 3,809-3,814 or close to the Mar 2023 bottom (3,808.86) before finding a market bottom.


Source: Chart courtesy of StockCharts.com

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