S&P 500: Strong, Otherwise – Week Beginning December 4 (Technical Analysis) (SP500)

The holiday season is underway and the S&P 500 (SPY) is approaching 2023 highs after posting its fourth-best November performance ever. Meanwhile, the 10-year yield was significantly below 4.32% (the 2022 high) and the market fell approx. Next year, the Fed will cut it by 100 basis points. Goldman Sachs noted that “November was the month with the greatest easing in U.S. financial conditions in over 40 years.”

All of this is optimistic, but it’s now in the rearview mirror. This week’s article will examine the next expected moves and possible catalysts. Most importantly, it explains the specific conditions that can sustain bullishness or reverse bearishness. Various technical analysis techniques are applied at different time frames in a top-down process that takes into account key market drivers. The goal is to provide actionable guidance with directional bias, critical levels, and expectations. For future price action.

S&P 500 Monthly

The November bar rose 8.9%, closing close to the month’s high. This provides a clear positive bias, with new highs already being recorded in December.

A bullish bar typically tests lower in the first part of the period and closes near the high. Given that the 2023 annual bar is generally bullish (but still within the 2022 range), a close near the high of 4607 is typical. A reversal could be set up where new highs above the November high of 4587 are rejected, but the December bar would need to close near the low for this to develop into a solid signal.

The key resistance zone at 4593-4607 is being tested. The all-time high of 4818 is the next major level.

As mentioned earlier, the November high of 4587 will be important going forward. The initial approval rating is 4541 based on the September high point, but this is at a minimal level. Actual support is much lower at 4393 and 4325-35.

The September bar completed Denmark’s rising exhaustion figures. This worked and we will have to wait a long time for the next monthly signal. December will be bar 3 (out of a possible 9) in the new downward burn count.

S&P 500 Weekly

Another continuous bar formed this week. A strong close near the high will see some project above 4599 next week, with the 4607 high being a logical destination.

4607 is certainly significant, but it is not an inflection point. A trade at 4608 does not necessarily mean a trip to 4818 and an all-time high. This means that a reversal may occur regardless of whether 4607 holds or not.

The weekly gap of 4637-4662 is the next area of ​​interest above 4607. 4712 is a measured move (the current rally is like the initial rally in October-December ’22).

This week’s low of 4537 is key support.

Next week, we will see Demark’s upside exhaustion count on the 6th bar (out of 9). This means counting could continue until the end of December before a response occurs.

S&P 500 Daily Index

The November rally has been so strong that the pullback is barely visible on the weekly charts and a daily view is needed to see the important details. Nonetheless, only two “decent” corrections can be identified in the rally. Last week’s drop to 4537 and November 9th’s drop to 4343, which lasted only one session.

A strong rally doesn’t mean much in terms of future returns. The bear market rallies in March 2022 and July-August 2022 were similar in size and duration. Perhaps a better comparison would be October to November 2021. Because the S&P 500 was in an upward trend at the time and was up 9% in just 17 sessions. It then tapered off in December and peaked in January.

I’m not necessarily saying this will happen again, but I will use technical indicators to signal when that is more or less likely.

Resistance points all come from the monthly/weekly charts.

On the other hand, support levels mostly come from daily charts. As mentioned earlier, the 4537 low is important. The 20dma may apply as it is currently at 4485 and rising 14 points per day. 4487 is the next key level as the area below is “thin” (low volume) and a break could quickly lead to 4421.

Denmark’s last fatigue signal, completed on November 22, led to a pause but no real decline. The next count will be on Monday at bar 3 (or possibly bar 9). This means there will be no response next week.

Next week’s drivers/events

Markets were quick to price in the rate cut, and Federal Reserve Chairman Powell’s pushback on Friday was fairly tame. No one believes that a rate hike is still possible. That said, given the performance of the S&P 500, the record easing of financial conditions mentioned earlier, and the strong economy, a rate cut is unlikely at this point. This theory could be tested next week as Friday is NFP day. Strong numbers could challenge interest rate cut expectations and lead to a decline in the S&P 500.

So good news can be bad. But is bad news good? Not necessarily. Weak jobs figures support expectations of cuts but could also put a dent in the “soft landing” narrative. The labor market is key to the economy, so if numbers are too low and unemployment rises again, concerns about a recession could refocus.

Simply put, the jobs report needs to be very close to expectations to support this rally, and the bar is set high for a sustained positive response.

The ISM Services PMI is released on Tuesday but is likely to result in near-term volatility.

Markets will be paying attention next week when CPI, FOMC meeting, and retail sales all close. There is also an interest rates meeting of the ECB, BoE and SNB on Thursday.

Movement expected next week

The S&P500 charts are bullish on all time frames (except the annual chart, which is neutral and trades inside bars). It is worth noting that the 2023 peak at 4607 is close and the rally has moved significantly in a short period of time, but this is more of a reason to be strong by easing buying ahead of the NFP rather than a reason to be bearish.

Given this week’s strong close, the test of 4607 is likely to continue, followed by a break to test the weekly gap at 4637. With so much important news scheduled for late next week and into the next week, the rally should die down and we should start consolidating. Back through 4607, a test of 4537 would act as the bottom of a bullish flag at Christmas, setting up a further rally to 4712 and possibly 4818 early next year.

A weak close below 4537 would be the first sign of weakness. A close below 4487 would solidify a decisive reversal. This may be too far from ideal, but this is often the dilemma. You can either take more risk and guess, or give up a lot of reward and wait for confirmation. Personally, if things unfold as expected, I would be buyers around 4537, while sellers would need a convincing breakout of this level.