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 $SPX to reach not only the downtrending 200-day Moving Average, but the downtrend line for this bear market. Both are near 4100. A strong move above 4100 would break that downtrend line, but it would not necessarily be the end of the bear market. The next resistance level above that is the August highs at 4325.
The stock market ($SPX), has continued to rally this week, so the bullish case gained some traction across a number of factors. The close above resistance at around 4000 was a positive step in terms of price and sets up a move to at least the 200-day moving average or the 4070-4100 area.
The rally that began in mid-October was a fairly strong one that was backed by massive oversold conditions that existed at the time. By the time it got to 3900 (400 points off the lows), it was a bit vulnerable, and when Fed Chairman Powell made some very negative comments, the market quickly gave back 200 points. After that FOMC meeting, the market remained rather leery of the CPI data that was to be released early in the morning of November 10th. So, it traded in that 3700-3900 range while it waited. The CPI data was modestly encouraging (although it remains to be seen what the Fed thinks of it), and the market exploded to the upside as many traders and investors think that interest rates have peaked.
The oversold rally that began in early October was proceeding at a good pace, and was strengthened by a breakout over 3900. However, the comments by Fed Chairman Powell after the FOMC meeting knocked the market down significantly. We have often referred to the fact that the current market bears great similarity to the bear market of 1973-1974, and this is yet another example. Back then, Fed Chairman Arthur Burns would speak, and the market would tumble.
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.
