The S&P500 ($SPX) rose 4.7% last week, busting through a resistance trendline. The index sits 3.5% below the 50-day moving average and 9.3% below the 200-day moving average.
2022-10-23-SPX Trendline Analysis - Daily
The ADX signal continues in a downtrend, but price/volume flipped on Friday. The new uptrend signal comes from the follow-through day on Friday (>1.5% increase on higher than average trading volume).
That said, it's not an all clear, risk-on signal. The index still trades below the 50 day, and the higher volume follow-through was largely due to monthly option expiration. And the Friday session had A LOT of option volume, particularly in index options such as the SPX, meaning the session was more about trading options hedging activity, rather than strength from something like corporate earnings. Not to mention the fact that the VIX remains near 30.
2022-10-23- SPX Elliott Wave Analysis - Daily - Primary Y
Elliott Wave analysis still puts the SPX in the first wave of a 3-wave countertrend rally. For now, 3900 is still a plausible target, but the SPX has to make it past 3800 first. It's still possible that the prior downtrend isn't over and the SPX is working through a complex Minor 4 which would mean another wave down to complete Minor 5 (not pictured).
Rather than monthly option expiration, there was a lot of commentary on another cause for last week's rally. It's a bird, it's a plane...no, it's another Fed Pivot!
Okay, it's not a "pivot" this time; that would mean the Fed would cut rates. And it's not a "pause", or a stoppage in rate hikes, like the narrative that fueled the summer rally. This time, it's the hope that the target rate for ALL of the rate hikes (i.e. the "terminal" rate) will be lower than the market currently expects, so the December rate hike will only be 0.5%.
A few weeks ago, I mentioned that the Fed doesn't meet until November 1-2, so it was anyone's guess until that point in time. This "guess" came courtesy of Nick Timiraos of the Wall Street Journal, the Fed’s “unofficial” source when they want to send a signal to the markets. What did they want to communicate? A cut? A pause? A lower terminal rate?
No. Apparently the Fed wanted everyone to know that they'll discuss reducing the pace of rate hikes after raising rates 75 basis points in November. If that's the only good news for investors, that's not good. Believe it when you see it in the yield curve my friends.
Earnings season continues this week. So far, reports are not as bad as feared, but executives are expressing more concern about their outlooks for Q4 and 2023.
Investor sentiment is really bearish, and many stocks are oversold based on technical indicators. Those conditions set the stage for a tradable rally, but not a "buy and hold" type of bottom. Bear markets end when investors throw in the towel and stop trading all together. Judging from the trading volume on Friday, we're not there yet.
Best To Your Week!
P.S. If you find this research helpful, please tell a friend.
If you don't, tell an enemy.
Sources: Bloomberg, CNBC, Federal Reserve Bank of St. Louis, Hedgeye, U.S. Bureau of Economic Analysis, U.S. Bureau of Economic Analysis, WorldGovernmentBonds.com
Charts provided courtesy of stockcharts.com.
Once a year, I review the market outlook signals as if they were a mechanical trading system, while pointing out issues and making adjustments. The goal is to give you to give you an example of how to analyze and continuously improve your own systems.
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