Stocks rallied very strongly this week, and the gains that have been registered since Christmas have been spectacular. This has caused most fundamental investors, and especially the headline- chasers, to become very bullish. Do not be lulled into their euphoria.
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The $SPX chart is still bearish, as it continues to exhibit a series of lower highs and lower lows, occurring beneath a declining 200-day Moving Average. That is a bear market. There is support at 2350, the late December lows, and there is now resistance 2580-2600, which had been support earlier in the year.
In falling as far as it has, $SPX broke below almost all of the support areas that had been in place. There is now support at 2350 -- last Monday's lows. There was also a bit of support in that area back in the spring of 2017, but that is probably rather meaningless; support that old is not too relevant to a market that has this much momentum and volatility.
The bears have a tight grasp on this market right now, which is a bit surprising since it is so late in the calendar year. Typically by this time, even in bear markets, there is something of a year- end rally.
New post-October lows were established this week when $SPX traded down to 2583 on Monday. That confirms that this is a bear market, in case you had any doubts.
The action in the stock market is getting more volatile, at least in realized terms (implied volatility has not kept pace). The bottom line is that resistance at 2800-2820 has been reinforced, and similarly, support at 2580-2620 has been reinforced as well. The $SPX chart is bearish, in our opinion, as long as $SPX remains below 2820.
There have been a number of positive developments in the past week or so: buy signals, oversold conditions producing rallies, and so forth. But the primary concern is how the $SPX chart looks, and it continues to look bearish. It is still in a downtrend, with heavy resistance at 2820. If that resistance were overcome, then our stance would change to a more positive one.
The $SPX chart remains bearish. This week's action did not decline far enough to be a test of the October lows. The support area at 2580-2600 remains the bulls' best hope at the moment. If that gives way, then 2530 is the next stop. A violation of that area would be very negative.
If you enjoy seasonal trading patterns, they abound from the end of October (the “October Seasonal,” which was strong this year), through the beginning of the new year (the “Santa Claus” rally). Over the years, we have combined three different late-year seasonal patterns into one trade.
The three patterns are as follows:
Several times, we have mentioned the fact that in a bear market, there is usually selling in October, followed by a strong October Seasonal rally, and then a failure of that rally in early November. If it is truly a bear market, new lows are made in November or early December.