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Year End Rally Ends?

Christmas is only ten days away. Stocks have historically finished December with gains. However, investors looking for a Santa Claus to year-end stock market rally may be disappointed this year, as the mid-Oct 2022 oversold rally may have run its course.

The hawkish Fed comments yesterday, weak retail sales and manufacturing numbers, and the rate hikes by central banks in the UK, the eurozone, and Switzerland raised fears of a weakening global economy. The falling treasury bond yields, inversion of the yield curve, declining commodity prices, and widespread selling in economically sensitive and growth-related sectors warn of an impending recession next year.

The question remains whether it will trigger a brief and shallow recession or a long and deep recession.

Although it is easy to say that this is another Fed-induced stock market selloff and blame this week's selling on triple witching options expiration, it is the failure of the stock market to reverse the primary downtrend and formidable overhead resistance that is the primary reason for the selling.

The market did it again, confounding investors and traders with another oversold rally that faded when they needed it most.

Although the SPX 608.93 points rally from 10/13 to 12/1/22 is impressive, it was another oversold rally that failed to reverse the primary downtrend. The latest failed rally attempt is the fourth oversold rally in the past year and warns of the fourth stock market downturn.

Formidable resistance remains at the top of the Jan 2022 downtrend channel (4,100), the 61.8-78.6% retracement (4,007/4,147) from Aug-Oct 2022 decline, and the 38.2-50% retracement (3,998.5/4,155) from Jan-Oct 20022 decline.

The stock market may have already discounted the traditional Santa Claus to the year-end rally via the explosive 17.44% but unsustainable 10/13-12/1/22 oversold rally, setting the stage for either lackluster trading into the end of the year or, worse, the resumption of the primary downtrend.

The 50-day ma at 3,861.66 remains critical support, as a violation can trigger further selling toward pivotal secondary support at 3,698-3,744 (Nov 2022 lows at 3,698-3,744), the 1-month breakdown downside projection (3,712.5), and the 61.8% retracement (3,724) from Oct-Dec 2022 rally).

The Sept and Oct 2022 reaction lows at 3,491.5-3,584 remain critical support. Violation signals a retest of the bottom of the 2021/2022 downtrend channel at 3,262/3,369.

Will this lead to another SPX bottom and the next oversold rally?

Initial resistance falls to the 12/15/22 gap-down (3,958-3,966) and 200-day ma (4,030) and above this to 4,100.5-4,119 (top of Jan 2022 downtrend channel, 9/12, 12/1, 12/13/22 highs), 4,195-4,219 (8/22/22 gap-down and 8/26/22 negative outside day high), and 4,825.28 (8/16/22 reaction high).


Source: Chart courtesy of StockCharts.com


Source: Chart courtesy of StockCharts.com

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