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Will the third time be a Charm?

Many have heard the expression, “The third time is a Charm.” The phrase refers to a good luck charm spoken when trying something for the third time. The origin comes from ancient times, suggesting that things that come in sets of three are good luck. Another possible origin is a common folk belief in the importance of perseverance. The third attempt is more likely to succeed than the previous two attempts.


With the Federal Reserve now firmly in a rate-hiking mode, investors have turned their attention toward a hard or soft landing. The recent erratic market actions suggest the bulls and the bears are converging toward a pivotal battle. The outcome of this battle will help decide the next directional trend.


SPX Technical Interpretation: Since late-2021, the prevailing and dominated SPX trend has been the short-term 3-month downtrend channel, evidenced by a series of lower highs and lower lows. The strong selling led to oversold conditions, resulting in two oversold rallies, including 1/24/22 to 2/2/22 rally, from 4,222.62 to 4,595.31, or 372.69 points (+8.83% in 7-trading days) and 2/24/22 to 3/3/22 rally, or 4,114.65 to 4,416.78 or 302.13 points (+7.34% in 5-trading days). A third oversold rally has developed from the 3/14/22 low (4,161.72), as SPX gained 250.95 points or +6.03% in the past 3-trading days.


The question is whether the third oversold rally will lead to a breakout (charm) or another failure (dud)?


Oversold rallies in bear markets are deceiving as they tend to be explosive but fleeting. The appearance of a bottom entices traders to return. However, the short-term rally fades as the buying is replaced by selling. To confirm the 4/24/22 low at 4,114.65 as the bottom, SPX needs to breakout above the resistance zone (4,417-4,595), coinciding with the following technical convergences:


(1) Top of the Jan 2022 downtrend channel = 4,386 (achieved 3/17/22)

(2) Lower-high pattern = 4,416.78 - 3/3/22 high

(3) The 50-day and 200-day moving averages = 4,437.5 and 4,469

(4) The 38.2%, 50%, 61.8% Fibonacci retracements from 1/4-2/24/22 decline = 4,383.5, 4,466.5, and 4,550

(5) Top of the Bollinger Bands = 4,449

(6) Left shoulder = 4,546 (9/2/21 high)

(7) Right shoulders = 4,590-4,595 (2/2 and 2/9/22 highs)


In the days and weeks ahead, expect one of the three scenarios to occur:


The bull case scenario involves SPX breaking out above 4,417-4,595, confirms the 2/24/22 low as an important bottom, and suggests a retest of the 1/4/22 all-time high (4,818.62). A new record high confirms the resumption of the structural bull trend.


The neutral scenario involves the failure of SPX to clear above resistance zone, signaling another period of consolidation between 4,100-4,200 (support zone) and 4,417-4,595 (resistance zone).


The bearish scenario involves the failure of SPX to break out above the resistance zone (4,417-4,595), leading to a subsequent violation of the support zone (4,115-4,233). The breakdown below 4,115-4,233 confirms a neckline breakdown and warns at a decline of 596-704 points toward an SPX downside projection at 3,500-3,800.


Source: Chart courtesy of StockCharts.com

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