Primary Chart: Fibonacci Levels, Key EMA, and Uptrend Channel off Lows
S&P 500 (SPX) has bounced hard off its lows on October 13, 2022, the date the CPI was released. Although price has chopped and whipsawed, it has been steadily working its way higher. But choppy price action is not without a purpose in technical analysis: it can help identify the direction of the larger degree of trend because it typically runs countertrend to the larger-degree trend. Impulsive price action, by contrast, tends to powerfully impel price in the direction of the trend. Because corrective action moves against the trend, it tends to struggle to proceed in that countertrend direction. So the fact that price has been choppy as it moves higher suggests that the larger-degree trend remains downward.
This post does not suggest that SPX or any other equity index has seen a final and lasting low. The bear market remains in effect until the larger-degree structure materially changes. That has not happened.
SPX may rally, however, into the coming week. In this rally, the levels to be watched on the upside (resistance) include the following:
380 is a major Fibonacci cluster of levels (more precisely, the two levels are 379.92 and 380.05).
375.45 is the prior swing high on October 18, 2022, the highest point so far in the rally off October 13, 2022, lows.
372.41 is a key Fibonacci level at the .382 retracement of the second leg of decline from September 12 to October 13, 2022.
368.42 is a key Fibonacci level and it has also been a key level of resistance where gaps have occurred as well as actual price rejections over the past several weeks.
370.00 is a key options gamma hedging level that may have an effect through Friday, October 21, 2022.
366.47, 366.73 are the levels for the 21-day and 34-day EMAs as of October 20, 2022.
Price targets for this bear rally are at first 375 SPY. Only if 375 SPY can be reached and successfully held, then the next higher target comes into effect. The next higher target is 380 SPY, which correlates to about 3810 on SPX, the ticker for the actual S&P 500 index. The VWAP anchored to the major swing high in mid-August 2022 is currently at 383 SPY. But this VWAP is sloped downward, and will likely continue falling, albeit less sharply, over the next few days. This VWAP likely will coincide with the key Fibonacci cluster at 380 sometime next week. This anchored VWAP is shown in orange in the following chart:
Supplemental Chart: VWAP Anchored to mid-August 2022 High
On Tuesday, price began to pull back from its October 18, 2022, swing high at 375. So the levels to be watched on the downside (support) include the following:
364-365 is an important area of support in the coming day or two at the lower bounds of the parallel channel off the October 2022 lows. This level of support rises over time given that the line is sloped, so the support is dynamic. Given the direction of futures overnight, the 364 SPY level may likely be tagged before further upside can take place.
362.34 is a major Fibonacci retracement level applied to the range from the October 13-18 rally.
359.25 is the .618 Fibonacci retracement level applied to the range from the October 13-18 rally.
356.64 is both major price support from September 30 and October 10-13, 2022, but also a Fibonacci level. Below this level would strongly suggest that the bear rally is finished and new lows will be made.
Despite price moving higher and bouncing quite sharply off the October 13, 2022, low, it's important to note that the macroeconomic and monetary policy environment remain negative for equities and risk assets. CPI and PPI in the US, two widely considered measures of inflation, both came in hotter than expected in October 2022. Fed Funds Futures are continuing to price in a 75 basis-point hike at the FOMC meeting that concludes on November 2, 2022. In two other bear markets in the past 22 years, the US central bank was busy cutting rates to stimulate the economy and mitigate recession. Now, by contrast, the Federal Reserve and other central banks around the world are hiking rates to try to negate sticky inflation that has hit levels not seen for decades.
Finally, because this is a bear rally, by definition countertrend, price can fail at any time. Any trades are likely lower probability bets given that the primary trend has been powerful since January 4, 2022's all-time high, and especially since the August 16, 2022, peak. ________________________________________
Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
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One final thought to consider is the 2s10s yield curve. This curve's inversion has deepened. Many have speculated, especially over the summer before the Federal Reserve's Jackson Hole event, that the Fed might pivot. But the Fed has not, and continues to maintain its hawkish stance that rates will remain higher for longer until price stability is realized.
One commentator noted recently that the bond market will signal when the Fed might pivot. And that will be when the yield curve stops inverting. So far, it has remained deeply inverted and continues to move sideways in that state of inversion as shown below:
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SPY's price continues to bounce higher off the lower bound of the parallel channel this morning.
It's also interesting to note where the S&P 500 reversed course in its pullback over the last several days—right near the .50 retracement of the rally off the Oct. 13 lows. I will post a chart below with an arrow showing this:
But the up trendline that serves as the lower edge of the channel was more precisely the spot where the pullback reversed.
To reiterate, this post does not argue markets will return to an uptrend at the primary level of trend and back to all-time highs. That would take an immense amount of structural change. This is only a bear rally.
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SPY has now risen about 2.01% on the day and about 2.54% off the intraday low. It found support right at uptrend channel's lower bound, i.e., the up trendline from 10/13 lows. But early next week, it may run smack into resistance at the down TL from 8/16 highs. Above that down TL is the 380 level discussed as a key Fibonacci level and near prior swing highs on 10/5. This 380 level equates to about 3810 on SPX.
One additional way of conceptualizing the price target for this rally is shown in the chart below, with the measured move off the 10/13 lows as projected from the intraday low on 10/14. This shows a PT of 379-385, similar to the resistance levels listed above.
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Final update for the week on SPY—see notes on the chart below:
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SPX / SPY broke above its down TL from August 16, 2022 peaks. But there is more strong resistance overhead. Watching to see how those levels respond. As discussed in this original post and its updates last week, 380 is a crucial level. Watching 380 SPY (3800-3810 SPX) for how price responds here.
Trade closed: target reached
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At the time of this post on October 20 last week, SPY traded around 365-366 (SPX 3650-3665). The original post last week identified the initial price target as 375 SPY: "Price targets for this bear rally are at first 375 SPY. Only if 375 SPY can be reached and successfully held, then the next higher target comes into effect."
The next higher target was identified as 380 SPY. The post stated, "the next higher target [of 380 SPY]. . . correlates to about 3810 on SPX , the ticker for the actual S&P 500 index . The VWAP anchored to the major swing high in mid-August 2022 is currently at 383 SPY. But this VWAP is sloped downward, and will likely continue falling, albeit less sharply, over the next few days"
Both SPY 375 and 380 have been reached today. Although the SPX has not stalled yet, this counter-trend idea will be closed as having reached both the initial and subsequent targets 375-380.
I see the possible gap fill. The only I have is, its filling up too quickly. Momentum gets killed quickly if 1 thing hits the fan. that being said, I do expect a pull back of sorts. at this point 373ish looks plausible. The only other mention is FED, they are all out inflation. Inflation is still about the same, comparing some data in multiple states... so there is definitely more down side unless FED pivots which is unlikely right now. So, is it all priced in? I am not too sure. Let me know your thoughts
SquishTrade
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@Seckinoldo, Thanks a lot for your comment and analysis! You have made several great points. This is a tricky area here. No one really knows exactly where this bear rally will turn. The key for me was trying to identify quickly that there had been a shift in mid-October, that it had started off the lows of October 13, and quickly catch a piece of it rather than trying to catch all of it (especially in this whipsaw market we've had). I've learned that trying to catch an entire moves (and trying to catch every single move) can be very detrimental as it will usually lead to losses–at least it has done so for me!
At this point, I'm completely out. I suppose day traders may be catching pieces here and there, but my preference is for solid swing setups. The levels I anticipated 3800-3850 have been reached. Whether it goes to 3900, 4000, or the gap fill as you say is anyone's guess. I do wonder whether the gap fill can be reached just like you. Much depends on macro, Fed messaging (a 75bps hike is already priced in for November, but what is unknown is the messaging). And a 50 bps hike in December does not seem like a pivot, just a modest slowing of the hikes -- not only are rates still elevated, inflation is still sticky, and rates will probably be higher for longer as Fed has said, so that's not really a pivot in my opinion. But markets may view it that way, so shorts have to be careful. Remember in July how the markets misinterpreted Fed chair's presser as a pivot? Markets ripped into August, and then Powell spoke a Jackson Hole to "clarify" and markets tanked. Markets can be irrational longer than traders can remain solvent, so I'm not going to try to predict too much here. At some point, markets should likely turn (my expectation held loosely), but as your comment astutely points out, this squeeze looks like it has more room to run.
Seckinoldo
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@SquishTrade, thanks for the response. Very much appreciated, I agree with your point
DireWolf
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very nice, appreciate all the information!
SquishTrade
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@DireWolf, Thank you so much for reading and commenting. Your support means a lot!
BahamasX
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Thanks. I agree and appreciate the correctness of the expression...so far it's just a BEAR RALLY...