False Breakdown in the S&P 500 as Breadth Improves

SP:SPX   S&P 500 Index
The S&P 500 declined for pretty much all of September. But now it’s kicking off October with some potentially bullish activity.

The first pattern on the chart is the false breakdown under the September 20 low of 4306. SPX spent about an hour below that level this morning before the bears cried uncle and prices reversed higher.

Next, relative strength in the equal-weighted index ( RSP ) and small caps show breadth is improving. It’s also interesting that RSP made a higher low today, while SPX made a lower low. This suggests money is shifting away from the megacaps to more varied names –- a potential sign of increased risk appetite.

Third, stochastics recently fell to their most oversold condition since October 2020.

Fourth, SPX is bouncing at the 100-day simple moving average ( SMA ). This line also offered support at the last nadir of pessimism a year ago.

Finally, sentiment is important because surveys have shown the most bearish readings since the election. A similar gloom appeared in October 2019 amid the trade dispute with China. Both moments represented lows for the market.

Overall, risks clearly remain with yields rising, the Fed planning to taper and Congress still at loggerheads over the debt ceiling. But those concerns have been priced in (at least somewhat). And the next big catalyst -– earnings season in two weeks -- is more likely to be positive.

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