S&P 500: Lesson Learned – Week Starting 20th November (Technical Analysis) (SP500) -LSB

Last weekend’s article was titled “FOMO Top,” and as you might guess, it picked up this week’s moves in the S&P500 (SPY) completely wrong. I should have stayed Bulgarian instead of trying to predict a correction. In my defense, I do said a “close below 4393 should signal the start of a reversal,” which never happened and should have kept readers from shorting. But that hardly makes up for the lack of rallying.

So what went wrong? Did the technical analysis fail?

Absolutely not. Rather, my interpretation of the technique failed. While I noted that there was a bullish weekly close and a continuation bias, I “thought” any further rally would fail due to the size of the move from the lows and my expectation of a pullback before any continuation. However, there was no real evidence for this view.

The lesson was learned.

This week’s article will try to leave behind any failures and prejudices and look at new targets. Has the bigger picture of the CPI picture and the end of ‘higher for longer’ changed? Various technical analysis techniques will be applied over multiple time periods 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 November figure broke October’s high of 4,393 and was held as the week’s lowest on Monday. This will remain a key level until the close of November – a close above is bullish, while a close below is neutral. Only an unlikely close below 4201 (November open) would shift the chart’s monthly decline.

The September high of 4541 is the next resistance, with the key 4593-4607 area just above.

Initial support is 4393. 4201 is not really a support level, but it is important if the November bar is bullish or bearish. 4325-35 may still be relevant at some point, but it has been cut a bit too much to be a strong level.

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. November will be bar 2 (of a possible 9) in a new exhaustion count.

S&P 500 Weekly

Another continuation bar was formed this week. A strong close near project highs, some tracking above 4521 next week, with the 4541 peak as the logical destination.

The rally from 4103 is definitely bullish, but it remains at the highs and could just as quickly shift to the downside. Just look at the February-March recovery of last year.

I won’t try to predict a reversal, but a move higher fading back to a weak close (below 4521) would be the first stage of a POTENTiAL head. This should still continue to the downside in the coming weeks.

A close above 4521 would form another bullish bar that projects higher.

4541 is the next resistance, then 4593-4607.

There is no weekly support until the key level at 4393, with 4344 an important level below that.

A reverse number of Demark’s exhaustion will be on bar 4 (out of a possible 9) next week.

S&P 500 Daily

Technical analysis articles attract the occasional disparaging comment about “voodoo” charting. However, the daily chart below had most of the important levels (including the 4103 bottom and the current 4505 resistance) marked ahead of time. View the daily chart at October 29 article.

What impresses me is how the gaps during this rally have crossed important levels such as the 200dma resistance and the channel. I doubt it happened by accident.

The current three-session consolidation near 4505 is forming a bull flag and should establish higher continuation next week.

4541-51 is initial resistance at the high and gap from August 2nd. Filling the gap is 4576, which is approaching key resistance at the 2023 highs.

Initial support is the gap at 4459, then 4393 and 4344 joining the 50dma.

An upside number of Demark’s exhaustion will be on bar 7 (or a possible 9) on Monday. A reaction is expected at bars 8 or 9 which means a pause/pullback could start on Tuesday or Wednesday.

Leaders / Events Next week

Given the lack of CPI and negative PPI, inflation is expected to return to the Fed’s 2% target in the second quarter of next year. This gives it plenty of flexibility to cut back to a more neutral rate or even ease further in response to economic weakness. Consequently, a soft downside is the consensus view and the ‘higher for longer’ narrative is pretty much dead.

This backdrop appears to justify the stock’s rally and may make them immune to weak data for a while. Any problem with the economy can be solved with a few quick cuts, right?

Wrong. Evidence shows that rate cuts are not historically bullish and usually come too late to support the economy. Indeed, on average since 1994, the S&P500 has had a negative performance in the year following a downgrade (as this has been skewed by large declines during recent recessions).

So while the mainstream narrative might tell us that bad news is good and cuts will solve everything, this may not be the case.

The data is lighter next week, but as usual, I’ll be watching the Jobless Claims (due Wednesday due to the Thanksgiving holiday on Thursday) closely. Friday’s PMIs are also a leading indicator. US markets will close at 1pm on Friday.

Possible moves next week(s).

Given last week’s mistakes, the first thing to say is that the chart still looks good and there is no sign of a change yet. Indeed, there is a bias for a move higher next week to 4541, most likely 4562-76. Furthermore, if there are strong closes near these levels, the path should be higher still.

Daily exhaustion should start around Tuesday/Wednesday, so if any of these levels lead to a reversal lower and a weekly close below 4521 (ie within this week’s range), a tip can begin to form. The timing of this potential reversal doesn’t quite line up with next week’s shortened holiday week or the prospect of a ‘Santa’ rally, but we only have to look back as far as last year to see that weakness is very likely. around the holiday season (a reversal on December 1st leading to an 8% decline to the December 22nd low). Seasonality has worked well this year, but it’s not the only consideration.

The reason I’m even thinking about a top and reversal has to do with the bigger picture and the conclusion from my October 29 article: “Even if the S&P500 were to stage a multi-week rally to 4216 to the 4400s, it would just put another leg lower at a later date at a low of 4049.”

Yes, the recovery has been stronger than expected, and the background suddenly looks strong, but this is true in most peaks. A reversal lower and a weekly close below 4521 would give the bears a glimmer of hope.