S&P500 (SPY) has made a new high for the year at 4609, surpassing the July high of 4607. This is not something I expected when I proposed that a major bounce could develop from 4103, but the price action of The rally has been telling a bullish story and I’ve been listening. Last week’s article concluded, “continuation of testing 4607 seems likely and this is likely to be broken.” He also highlighted 4537 as a key level to hold (and trade against). The low of the week was 4546.
As I have said before, forecasting is only one part of technical analysis. Whether a forecast will perform as expected or not is likely to vary at times from price action and key inflection points. This week’s article will again outline specific conditions for staying up or flipping down. Various technical analysis techniques will be applied over multiple time frames in a top-down process that also considers key market drivers. The goal is to provide an actionable guide with directional biases, significant levels, and expectations for future price action.
S&P 500 Monthly
The December bar is continuing properly after the bullish action in November.
There is absolutely nothing bearish about the monthly chart at the moment, but there are ways this could change. A reversal could be created with a rally rejected and a December close below the November high of 4587 and near the lows of the monthly range. This isn’t a high-probability scenario given the context of the 2023 annual bar, but it’s still something to monitor.
The main resistance area 4593-4607 is being tested. The all-time high of 4818 is the next major level.
The November high of 4587 will be important going forward as mentioned earlier. Initial support is 4541 at the September high, but this is small. Real support is much lower at 4393 and 4325-35.
The September strip completed a countdown to Demark’s exhaustion. This has had its effect and will be waiting a long time for the next monthly signal. December is bar 1 (of a possible 9) in a new reverse exhaustion countdown.
S&P 500 Weekly
This week’s bar held a low, made a new 2023 and closed near the week’s high. It is easy to conclude that it is bullish and should continue next week.
Having said that, the small range and lack of progress (both this week’s high and close were 10 points above last week’s high and close) indicates a loss of momentum. Furthermore, there has been no weekly consolidation below the 4607 resistance suggesting that the breakout may lack impetus.
The weekly gap at 4637-4662 is the next area of interest above 4607. 4712 is a measured move (where the current rally equals the initial Oct-Dec ’22 rally).
4537 remains the main support.
A reverse number of Demark’s exhaustion will be on bar 7 (out of a possible 9) next week. Reactions are usually seen in bars 8 or 9.
S&P 500 Daily
The daily chart provides us with more detail and some potentially important information.
First, there was a heavy reaction to new rally levels on November 29th and December 1st. The force was sold.
Second, the loss of momentum is evident and there is divergence at Friday’s high. This can be inferred from the price action, but I have included an indicator at the bottom of the chart to make it clear.
While none of this is dire, it suggests that the breakout above 4607 is suspect and a reversal can develop.
All resistance points come from the monthly/weekly charts.
4607 is an important level, but it is not an inflection point and a daily close either side of it will not signal a major change in bias.
Short-term support is 4565 on the difference from December 6 and the pre-market NFP low. This week’s 4546 double bottom is vulnerable given the weak close on December 6, and I expect this level to be revisited and broken at some stage. 4537 remains important, with 4487 the next key level below. The 20dma could also be in play on a downside as it is currently at 4537 and is up 13 points on the day.
Given the unstable conditions, Demark’s exhaustion counts continue to be interrupted in their early stages. A new countdown will be at bar 2 (or a possible 9) on Monday, meaning no reaction is expected next week.
Leaders / Events Next week
Friday’s strong jobs report could continue to weigh in early next week. The numbers support the view of a soft easing for the economy, but also “higher for longer” rates. How long can stocks, yields and the US dollar rally together like Friday?
The CPI is due out on Tuesday and a month-on-month reading of 0.0% is expected to drop year-on-year to 3.1%. Markets may be very wary of any stronger reading given wages rose up to 0.4% and unemployment fell to 3.7%. UoM consumer sentiment also rose last week from 61.3 to 69.4.
The FOMC meeting is on Wednesday and while no hike is expected, there will likely be some push in rate cut expectations given the latest data. Recent attempts to sound hawkish have been ignored, but perhaps the market gets more attention given the growing risk of a second wave of inflation.
There are rate meetings from the ECB, BoE and SNB on Thursday, as well as data on retail sales and jobless claims.
Possible moves next week(s).
Next week’s challenge is more of a challenge than usual. To begin with, Friday’s move was unconvincing – it spent less than 15 minutes at new levels of 2023 above 4607 and then closed back down at 4604. Hardly a convincing breakout. There are also subtle signs of loss of momentum and evidence of dispersion, but these can easily be erased next week and the overall context remains good.
The macro background doesn’t help the conviction either. NFP was good news for the economy, but bad news for rate cut expectations, which creates a mixed picture for stocks. Next week’s busy schedule further complicates the situation.
To simplify the situation, I will again use inflection points and price action as a guide for possible moves.
The S&P500 remains bullish in the short term as long as it holds above Friday’s pre-market low of 4,563. A strong close above 4609 would project 4637, and further positive action (holding the previous session’s lows and strong closes) could sustain the rally to 4712 towards the end of the year.
A sustained break of 4537 is unlikely and is needed to create a bearish bias. It could even indicate that the top is in, although a close below 4487 would be needed to be sure. This could lead to 4335 and potentially lower.
There are reasons to be skeptical of the outbreak, and I personally wouldn’t follow the rally. Better opportunities will arise, either after a convincing bullish move above 4609, or after a decline near 4563. There could also be a brief rally below 4537 to pave the way for a post-Christmas “Santa Rally”. Now that would be a gift.