"Don't Fight the Fed" suggests that if the Fed is stimulating the economy with accommodative monetary policies, investors should not bet against a bullish trend. Conversely, if the Fed is restrictive with tighter policies, then investors should be cautious.
After Chairman Powell mentioned the pace of interest rate increases could begin to moderate as soon as the next FOMC meeting in December, investors felt more comfortable, and stocks rallied sharply on the news.
So, are we out of the woods yet?
The more relevant question is when will the Fed pivot.
A Fed pivot occurs when the Fed reverses its policy outlook and changes course from expansionary (loose) to contractionary (tight) monetary policy and conversely from contractionary to expansionary policy.
While Chair Powell has signaled that the Fed is open to smaller rate hikes as early as December when the Fed will pivot is less clear.
The market is not necessarily out of the woods as long as the cyclical bear decline over the past year remains intact.
We recommend investors continue to monitor interest rates and stock market resistance levels to determine when the Fed will pivot.
The Dow Jones Industrial Average (INDU – 34,395.01) has solidly surged above the 200-day ma (32,461.44) and the Jan/Apr 2022 primary downtrends (33,054/33,246). The blue-chip average is now testing the crucial 8/16/22 reaction high (34,281.36) and the Feb/Apr downtrend (34,397).
The S&P 500 Index (SPX – 4,076.57) surpassed the 200-day ma (4,048.33) yesterday and is now challenging the Jan 2022 primary downtrend (4,140) and the Jun and Sept 2022 highs (4,177.5/4,119).
Although the two indexes have cleared pivotal resistances, it is too early to determine if the stock market rally can sustain and widen to include the battered markets such as the Nasdaq Composite and growth markets.
Yesterday, the Technology and Communication Services sectors dramatically outperformed their S&P 500 peers soon after Chair Powell's comments on interest rates. Nasdaq Composite Index (COMPQ – 11,482.45) and Nasdaq 100 Index (NDX – 12,041.89) also outperformed their counterparts since the Mid-October bottom.
Although technology and growth stocks do not necessarily have to return to prior leadership roles to confirm the resumption of the May 2013 structural bull trend, it would be helpful if COMPQ and NDX also clear above their respective resistances.
Below is a technical update on NDX and pivotal technical levels.
Five positive outside days (i.e., 10/13, 10/21, 10/28, 11/4, and 11/22/22) and a large gap-up (11/10/22) have led to another NDX rally from the 10/13/22 low (10,440.64).
So, is this another oversold rally or the start of a sustainable intermediate-term recovery?
NDX nears a critical phase of its Oct 2022 rally as it challenges pivotal intermediate-term resistance at 12,420-12,898. The outcome of this test will help to decide the next directional trend.
The resistance converges near the 9/13/22 gap-down (12,327-12,640), top of the Bollinger Bands (12,327), 61.8% retracement (12,468) from Aug-Oct 2022 decline, 200-day ma (12,541), Dec 2021/Mar 2022 primary downtrends (12,531/12,630), 6/2 and 9/12/22 highs (12,898/12,753), and the 38.2% retracement (12,856.5) from the Nov 2021-Oct 2022 decline.
A convincingly break out above this crucial resistance reverses the 1-year primary downtrend and signals an intermediate-term recovery toward 13,721 (Aug 2022 reaction high).
Above the Aug 2022 high confirms a higher-high pattern and reaffirms an intermediate-term rally toward 14,349 (61.8% retracement) and 15,196-15,265 (Feb/Mar 2022 highs).
However, failure to surpass intermediate-term resistance at 12,420-12,898 warns of another pullback to initial support at 11,342-11,523 (middle of the Bollinger Bands, the 11/29/22 low, and the 50-day ma) and below this 11,013-11,236 (11/10/22 gap-up), and 10,441-10,720 (bottom of the Bollinger Bands, and the Oct and Nov 2022 reaction lows).
Violation of the Oct/Nov lows confirms the resumption of the primary downtrend and another NDX sell-off.
What are some of the technical indicators saying?
Previous relative strength breakouts above the NDX/SPX downtrend have led to NDX outperforming SPX, at least on a near-term basis. The relative strength of NDX/SPX nears a critical juncture as it challenges the top of the Aug 2022 downtrend channel.
MACD price momentum indicator continues to climb higher, suggesting firming price momentum that may lead to a retest of the mid-Aug 2022 highs.
RSI overbought/oversold indicator (60.07) has improved from the Sept/Oct 2022 lows. There is still room for the RSI indicator to rally toward the Aug 2022 overbought highs near 70.
Stocks enter the last trading month of the year, a favorable seasonal period. Money managers may be pressed to deploy funds into the marketplace, especially if they are behind in performance.
Will a convincing breakout above the NDX intermediate-term resistance trigger another Santa Claus rally?