What a difference a week can make. Especially when there's a 5.8% gain and the best performance of the year. Bulls held the critical 4100 level and the recovery soon turned into a stampede. The S&P500 (SPY) closed higher every session for the first time since November 2021.
To be honest, on Monday morning I had little idea what was in store. However, I did know there was a good chance Monday would be strong (the S&P500 has now closed higher on Monday 16 out of the last 17 times). I also knew 4100 was key support and if it held there could be a major recovery "as high as the 4400s". Here's how last weekend's article concluded: "...if this large bounce is to play out it really needs to start next week. Any further bearish price action through 4100 would set up a much more direct move lower..."
The trade and the stop level were therefore clear. Technical analysis can't give us a crystal ball into the future but it can allow us to identify opportunities with very good risk/reward. Everything else is out of our control.
This week's article looks at how the rest of this rally could take shape and opportunities it may present. Various technical analysis techniques will be applied to multiple timeframes in a top-down process which also considers the major market drivers. The aim is to provide an actionable guide with directional bias, important levels, and expectations for future price action.
S&P 500 Monthly
The October bar bounced slightly from support but not enough to cement a reversal; this was still a bearish bar. However, it can be neutralized with a bullish bar in November which either closes above the October high of 4393 or forms an inside bar to set up a break higher in December.
The open of 4201 should really hold for a bullish bar to form.
Monthly resistance is now the October high of 4393, then 4593-4607. 4325-35 may still be relevant at some point, but has been chopped through a little too much to be a strong level and offered no resistance during last week's rally.
Initial support is 4103, then 4049 at the April-May double bottom in confluence with the 50% retrace. 4201 is not really a support level but is relevant to whether the November bar is leaning bullish or bearish.
The September bar completed a Demark upside exhaustion count. This is having a clear effect and the weakness can persist over several bars (months). November will be bar 2 (of a possible 9) in a new downside exhaustion count.
S&P 500 Weekly
The weekly TDST of 4103.98 held like a charm. TDST is a Demark derived support originating at the low of the preceding exhaustion count and has been marked clearly on my weekly chart since it formed in late July.
Such was the strength of this week's move, it surged right back into the broken channel. However, this does not mean the uptrend is somehow still intact - it simply means the channel is no longer relevant (I will delete it next week). The weekly trend is down until 4607 is exceeded.
This week's strong close at the highs projects continuation early next week with the 20-week MA and 4393 pivot level a logical target.
Initial resistance is the aforementioned 4393 at the 20-week MA and pivot highs. 4430 is potential minor resistance should the rally stretch higher without any consolidation.
The gap at 4117-4132 is initial support, with 4103 TDST support. The 50-week at 4200 has not provoked a reaction at all, yet, but I will still take a note of it in case it lines up with other factors on any dip.
This week's bounce aborted the downside Demark exhaustion count. A new upside exhaustion count will be on bar 2 (of a possible 9) next week.
S&P 500 Daily
Nothing stood in the way of this week's rally. The way the S&P500 gapped over the 200dma and channel resistance is a thing of bullish beauty.
However, this action is not likely to continue. The continuation gap between Wednesday's close and Thursday's open should mark the half-way point of this phase of the rally which suggests it terminates just over 4400. 4393 has already been identified as potential resistance, although this seems a bit obvious. Gap fill at 4402 and the 61.8% Fib retrace at 4415 (in confluence with the little know Wolfe Wave target) are the next levels of interest.
Any high formed next week is likely only the first leg of a larger rally. While it could lead to a decent-sized (100-200 point) correctional dip, it should be a buying opportunity for another proportional leg higher.
Initial support is 4325-34. The gap at 4237-68 is a more compelling area once this phase of the rally completes and makes a larger correction.
An upside Demark exhaustion count will be on bar 5 of a possible 9 on Monday. A reaction is expected on bars 8 or 9 which means weakness could start on Thursday/Friday.
Drivers / Events Next Week
This week's frantic schedule has given the market to a lot to digest.
Long-term yields made their largest decline since March due to a triple whammy of news.
Firstly, the US Treasury QRA (Quarterly Refunding Announcement) revealed lower than expected Q4 borrowing estimates and a shift away from long-term bonds in favour of shorter maturities.
Secondly, the FOMC Meeting was less hawkish than expected. Markets are coming round to the idea that the Fed has finished hiking.
Thirdly, the economy is clearly not as hot as many thought and 'higher for longer' rates may not be needed after all. PMIs missed by a long way, unemployment rose to a 18-month high and Q4 GDP estimates were revised down to just 1.2%. The focus could soon shift to recession and rate cuts.
There is a lull in scheduled releases next week. Fed Chair Powell is due to speak on Wednesday and Thursday at the Division of Research and Statistics Centennial Conference in Washington DC, but surely has nothing new to add to his FOMC meeting remarks.
Claims on Thursday are important, especially in light of this week's labour report misses. Anything near 250k is a red flag for the economy.
Consumer sentiment will be released on Friday.
Earnings season is drawing to a close after a broadly positive performance. 403 companies in the S&P 500 Index have reported and 81.6% beat EPS estimates. This was well above average. On the other hand, EPS growth expectations for H2 '24 have been trending lower (although they bounced back last week).
Probable Moves Next Week(s)
Will Monday close higher again and make it 17 out of 18? With the strong weekly bar and close at the highs, I would not bet against it. At the very least, there should be follow through to new highs above 4373 in the first half of the week. 4325-34 should initially hold dips for a target of 4402, perhaps 4415.
Daily exhaustion should have an effect from Thursday onwards and I don't expect 4415 to be exceeded before a large correction to the rally. It's hard to say where this dip will target before it's even started, but I won't get interested until the 4268 area and may look as low as 4200 over the next week or two.
Bigger picture, I said in last weekend's article "...any low made next week is almost certainly not the bottom." I stand by this call, although the strength of this week's recovery has dented my confidence, and what I thought would be a "multi-week rally through 4216 to as high as the 4400s" may end up taking most of Q4 and reach the high 4500s. Christmas has been saved.
One thing to note is that this week's snap-back rally in stocks was helped by the drop in long-term yields. This is logical given their recent correlation. However, should yields fade further due to weak economic data and rising odds of a recession, the positive effect on stocks will likely fade. Indeed, stocks and yields could end up dropping together as they did in 2000-2002 and 2007-2008.
Andrew McElroy
Andrew McElroy has been an independent trader since 2009.He is Chief Analyst at Matrixtrade and author of the ebook 'Fractal Market Mastery.'Andrew has developed a unique system of technical analysis which is combined with an understanding ofmarket driversto make high probability calls on market direction and reversal points.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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