The long-awaited breakout over what had become triple resistance at 4100 has occurred. $SPX closed above that level on February 1st and then added another strong day on top of that on February 2nd, thus confirming the breakout with a two-day close above 4100. That should lead to a challenge of the next resistance levels. First, there is the gap just above 4200 that created the island reversal back in August, which led to the downward leg into October at that time. Next up after that are the August highs at 4300.
Stocks have moved back and forth through several supposed minor support and resistance levels this week. As a result, the picture has developed into that of a wider trading range, awaiting a breakout in one direction or the other. On the upside, there is double resistance at 4100, where the market topped out twice in early December. On the downside, there is support in the 3760-3800 area, where the market bottomed in late December.
Stocks started the year off strongly, rallying with expanding breadth and favorable put-call ratio buy signals. However, in the end nothing changed as once again $SPX was unable to penetrate through the downtrend line that defines this bear market, as well as failing to rise up through its declining 200-day moving average. So, stocks have fallen back from there. The first support level at 3940 has been violated, and the next one at 3900 might be in jeopardy, too. That leaves 3760-3840 as the next support area. A failure there, and one can state with certainty that the bear market has resumed.
The stock market has put on a good show of strength this week, after breaking out on the upside from the trading range that had held prices in check throughout the last half of December. $SPX is now challenging the downtrend line of this bear market as well as its declining 200-day Moving Average, both of which are near 4000. A clear breakout above 4100 would be very bullish.
We are well into the new year of trading, and the seasonally bullish period surrounding year-end has passed. The Santa Claus Rally produced a small gain for $SPX of 30 points less than its historical average of a 1.1% gain, but a gain nevertheless. If it had been a loss, that would have been another negative for the stock market.
This is supposed to be a positive time of the year for the stock market -- the so-called "Santa Claus Rally" period. Typically, the market advances about 1% during the last five trading days of one year and the first two of the next. But If this seasonal period ends with a loss, that is generally negative for the broad stock market. As the creator of this system, Yale Hirsch, said: "If Santa Claus should fail to call, bears may come to Broad and Wall." Classic!
Stocks continue to struggle after $SPX broke down through the 3900 support level a week ago. The end of the trading year typically brings with it a short-term rally, classified as the "Santa Claus Rally" by the late Yale Hirsch.
When $SPX rallied strongly after December CPI figures were released this past Tuesday (December 13th), it ran out of gas almost exactly at 4100 -- the resistance level from early December, and right about in line with the downtrend of this bear market. Sellers emerged at that point and not only thwarted the rally but pushed $SPX down so hard that it broke major support at 3900. The latter move came after the FOMC not only raised rates (again) but also made some hawkish statements about continuing to raise rates.
Stocks ran into some severe resistance at the end of last week, when the rally that began in early October ran into the downtrend line of this bear market. Also, the rally peaked out after briefly climbing above the still-declining 200-day Moving Average of $SPX. So far, the bears have won the battle, and there was some rather heavy selling in the early part of this week. This has put the bulls on notice: hold the line at support at 3900, or expect another bad December.
The market continues the rally that began in early October. Yes, there have been some severe down days mixed in, but $SPX has generally been overcoming one resistance level after another and closing gaps left on the way down (most recently, the island reversal gaps from early September have been filled). This morning's strong job report has knocked the market down 50+ $SPX points, but that is not necessarily a rally killer. The most recent breakout above resistance at 4030 led $SPX to reach not only the downtrending 200-day Moving Average, but the downtrend line for this bear market. Both are near 4100. A strong move above 4100 would break that downtrend line, but it would not necessarily be the end of the bear market. The next resistance level above that is the August highs at 4325.