S&P 500: Lesson Learned – Week Starting 20th November (Technical Analysis) (SP500)

Last weekend’s article was titled “FOMO Top,” and as you may guess, it got this week’s moves in the S&P500 (SPY) completely wrong. I should have stayed bullish instead of trying to anticipate a correction. In my defence, I did state “closing below 4393 should signal the beginning of the reversal,” which never happened and should have kept readers safe from shorting. But this hardly makes up for missing the rally.

So, what went wrong? Did technical analysis fail?

Absolutely not. Rather, my interpretation of the technicals failed. While I pointed out there was a bullish weekly close and a bias for continuation, I “thought” any further rally would fail due to the size of the move off the lows and my expectation for a pullback ahead of any continuation. However, there was no real evidence for this view.

Lesson learned.

This week’s article will try to leave any failings and bias behind and will look at new targets. Has the CPI miss and the end of ‘higher for longer’ changed the bigger picture view? Various technical analysis techniques will be applied to multiple timeframes in a top-down process which also considers the major market drivers. The aim is to provide an actionable guide with directional bias, important levels, and expectations for future price action.

S&P 500 Monthly

The November bar has broken the October high of 4393 and this held as the low of the week on Monday. This will remain a key level into the November close – a close above is bullish, while a close below is neutral. Only an unlikely close below 4201 (the November open) would shift the monthly chart bearish.

The September high of 4541 is the next resistance, with the key area of 4593-4607 just above.

Initial support is 4393. 4201 is not really a support level but is relevant to whether the November bar is leaning bullish or bearish. 4325-35 may still be relevant at some point, but has been chopped through a little too much to be a strong level.

The September bar completed a Demark upside exhaustion count. This has had its effect and there will be a long wait for the next monthly signal. November will be bar 2 (of a possible 9) in a new downside exhaustion count.

S&P 500 Weekly

Another continuation bar formed this week. A strong close near the highs projects some follow through above 4521 next week, with the 4541 peak the logical destination.

The rally from 4103 is obviously bullish but remains at lower highs and can shift bearish just as quickly. Just look at the February-March recovery last year.

I won’t try and predict a reversal, but a move higher which fades back into a weak close (below 4521) would be the first stage of a potential top. This would still need to follow through to the downside in subsequent weeks.

Closing above 4521 would form yet another continuation bar projecting higher.

4541 is the next resistance, then 4593-4607.

There isn’t any weekly support until the key level at 4393, with 4344 an important level below that.

An upside Demark exhaustion count will be on bar 4 (of a possible 9) next week.

S&P 500 Daily

Technical analysis articles attract occasional condescending comments about chart “voodoo.” Yet, the daily chart below had the majority of the important levels (including the 4103 bottom and the 4505 current resistance) marked on ahead of time. Check out the daily chart on the October 29th article.

What strikes me is how the gaps during this rally have skipped over important levels such as the 200dma and channel resistance. I doubt it happened by accident.

The current three session consolidation near 4505 is forming a bull flag and should be setting up continuation higher next week.

4541-51 is initial resistance at the pivot highs and gap from the 2nd August. Gap fill is 4576 which is getting close to the major resistance at the 2023 highs.

Initial support is the gap at 4459, then 4393 and 4344 in confluence with the 50dma.

An upside Demark exhaustion count will be on bar 7 (or a possible 9) on Monday. A reaction is expected on bars 8 or 9 which means a pause/pullback could start on Tuesday or Wednesday.

Drivers / Events Next Week

Given the CPI miss and the negative PPI, inflation is expected to return to the Fed’s 2% target in Q2 next year. This gives plenty flexibility to cut back to a more neutral rate or even ease further in response to economic weakness. Consequently, a soft landing is the consensus view and the ‘higher for longer’ narrative is pretty much dead.

This backdrop seems to justify the rally in stocks and could make them immune from weak data for a while. Any problems with the economy can be solved with a few quick cuts, right?

Wrong. The evidence shows rate cuts are not historically bullish and usually come too late to support the economy. Indeed, on average since 1994, the S&P500 has a negative performance in the year following a cut (granted this is skewed by the heavy drops during recent recessions).

So, while the main stream narrative may tell us bad news is good and cuts will solve everything, this may not be the case.

Data is lighter next week, but as usual, I will watch Unemployment Claims closely (due on Wednesday due to the Thanksgiving holiday on Thursday). PMIs on Friday are also a leading indicator. US markets will close at 1pm on Friday.

Probable Moves Next Week(s)

With last week’s mistakes in mind, the first thing to say is the chart still looks bullish and there is no sign of a reversal, yet. Indeed, there is a bias for a move higher next week to 4541, quite possibly 4562-76. Furthermore, if there are strong closes near these levels, the path should be higher still.

Daily exhaustion should kick in around Tuesday/Wednesday so should any of these levels lead to a reversal lower and weekly close back below 4521 (i.e. inside this week’s range), a top may begin to form. The timing of this possible reversal doesn’t quite fit with next week’s shortened holiday week or the prospect of a ‘Santa’ rally, but we only need to look back as far as last year to see weakness is very possible around holiday season (a reversal on 1st December leading to a 8% drop into the 22nd December low). Seasonality has worked well this year, but is not the only consideration.

The reason I am even contemplating a top and reversal relates to the bigger picture view and the conclusion from my 29th October article: “Even if the S&P500 were to stage a multi-week rally through 4216 to as high as the 4400s, it would only set up another leg lower at a later date to a minimum of 4049.”

Yes, the recovery has been stronger than expected, and the backdrop all of a sudden looks bullish, but that is true at most tops. A reversal at a lower high and a weekly close back below 4521 would give the bears a glimmer of hope.