The SPX summer rally from 3,636.87 (6/17/22) to 4,325.28 (8/16/22) was a powerful 18.93% countertrend rally. The cyclical bear market that started in January 2022 may not be over as long as the primary downtrend remains intact.
The Fed continues to raise interest rates, inflation remains stubbornly high, the economy is in an unofficial recession, geopolitical concerns remain high, and corporate profits and earnings have begun to slow and will likely decline into year-end.
After SPX peaked at 4,325.28 in mid-August, stocks faltered and reversed directions. Recent market actions suggest SPX has yet to experience the classic signs of a longer-term market bottom. Technology and growth stocks suffered significant selling. However, the SPX selling has been orderly and lacking the panic and fear typical of a capitulation market bottom.
Although some overbought/oversold technical indicators, such as the RSI indicator, reached an oversold reading near the 30 levels, the VIX remains too low to establish a sustainable long-term bottom.
Continued rising interest rates, a deepening recession, weakening economic data, poor market sentiments, weak consumer confidence, and deteriorating technical conditions warn of another down leg in stocks.
Another 75-basis point Fed hike is expected after the FOMC meeting on Wednesday. The end-of-the-quarter window dressing can lead to heightened market volatility as money managers rebalance their portfolios into the end of the month and third quarter.
SPX nears pivotal support toward the mid-June reaction low of 3,636.87. Violation here sets into motion the next market selloff. Markets do not move in one direction. You can expect to see countertrend moves over the near-to-medium term. A breakdown below 3,636.87 reaffirms the next major market selloff.
Where will SPX achieve a major bottom?
Attached below are technical convergences of the support zones that may signal the SPX market bottom. The greater the number of convergences along the same level, the stronger or more significant the support.
(1) 5 technical convergences in the mid-3,000s between 3,393.5 and 3,505, placing this support zone as the next critical support. The support corresponds to the 50% retracement from the 2020-2022 rally (3,505), middle of the 2009 uptrend channel (3,488), bottom of the Jan 2022 downtrend channel (3,431.5), May 2022 head/shoulders top breakdown target (3,411), and Aug 2020 V-pattern breakout (3,393.5).
(2) 2 technical convergences in the low-3,000s between 3,195 and 3,233, coinciding with the 38.2% retracement from the 2009-2022 rally (3,233) and the 61.8% retracement from the 2020-2022 rally (3,195).
(3) 3 technical convergences in the high-2,000s between 2,743 and 2,948.5. The support represents the recent 4-month head and shoulders top breakdown target (2,948.5), the bottom of the 2009 uptrend channel (2,856), and the 50% retracement from the 2009-2022 rally (2,743).
(4) 2 technical convergences in the low-2,000s between 2,192 and 2,346.5, or the 2018 and 2020 lows (2,346.5 and 2,192), and the 61.8% retracement from the 2009-2022 rally (2,253).