The bulls are attempting to extend the rally that began in mid- October. Whether this fits in the broad category of October being a "bear killer" or not remains to be seen, but the breakout over 3800 on the $SPX chart this week was a positive development. As long as the Index holds that level, it is significant.
Deeply oversold conditions have spurred another rally attempt over the past week. $SPX made a trading low near 3490 on Wednesday, October 13th, and then early this week a strong rally took place. This rally generated some buy signals from our oversold indicators, but there has been no follow-through. The rally peaked at 3760 and has fallen back. There is fairly heavy resistance in the 3750-3800 area, which is where the most recent "island reversal" (circles on the chart in Figure 1) took place. Furthermore, the rally exceeded the declining 20-day Moving Average by a small amount, and then began to struggle. That is the classic action of an oversold rally.
The market closed out September at new lows for the year to date. Those new lows were accompanied by some massive oversold conditions. Seemingly, the turn of the calendar from September to October emboldened buyers, and they bought the market heavily on the first two trading days of October. In any case, this appears to be just another oversold rally, and those usually die out at about the declining 20-day Moving Average of $SPX (currently near 3800), or perhaps just a bit higher. This rally was accompanied by some confirmed buy signals, which we will review shortly. Thus, it might have a better prognosis, but the market has been unable to post any further gains since those two strong days.
The latest bearish phase of this market began in mid-August and has now carried $SPX to new yearly lows, both closing and intraday. This is a major negative development and reinforces the fact that this is still a bear market. The blue trend lines in Figure 1 echo that sentiment.
The bulls seemed to think they were in charge up until the latest CPI data was released. Then, in an abrupt change of face big money began to sell on Sep 13th and just kept driving the market lower all day. That selling has continued, at a slower pace, and the support area at 3900 has been violated. That is important support, and now traders are looking to 3800 as the next support level, and then the yearly lows at 3673 below that.
Early this week, stocks continued to sell off from their mid- August highs. But oversold conditions emerged (and are still in place in some cases), and $SPX rallied off of the 3900 level. That reinforces short-term support at 3900, and there should be support below that at 3800 and at the yearly lows, nearly 3637. But the next area of importance might be the resistance levels the first of which is at 4200, and then 4300 (the mid-August) highs. These oversold rallies have occurred all during 2022, with the average one gaining about 300 $SPX points.
Stocks have continued their sharp pullback after failing to break through the bear market downtrend line. That challenge came in mid-August at the 4300 level, and the decline since then has been steady and swift. Oversold conditions are beginning to appear, and soon we will see some confirmed buy signals, but the $SPX chart is still bearish and so a "core" bearish position is recommended. Other signals can be traded around that.
