It’s been a tough stretch for trend-following traders as a steep slump on Friday was erased Monday by a bone-rattling rally, states Jon Markman, editor of Strategic Advantage.
The S&P 500 (SPX) opened stronger and pushed all the way to 3,678. a gain of 2.7%. Bears are clearly in control of the intermediate trend, yet every dig toward new lows for the benchmark has been hard fought. This is mostly due to short covering. Although rates are still rising and corporate profits should come under fierce pressure, many bears worry about being heavily short at a time in the future when Federal Reserve hints that it is on track to become less hawkish.
Seasonality turns positive now through mid-November, and in kind of a big way. History is not destiny, but stocks do have a habit of repeating certain patterns tied to the calendar due to the way major market participants move trillions of dollars worth of customer money around near year-end.
There is still stiff overhead resistance at 3,708, the declining 20-day moving average. The bears might reload Tuesday at that level and send the index lower again. If they do not, a rally back to the October sixth gap at 3,739 is in the cards, with further resistance up at 3,800, the October fifth high.
For now, there is no need to be heroic. The tape will sort itself out in the early part of this week.
Data Junkie Update: Analysts over at Data Trek Research echo that view, offering this about the big Monday rally: “The S&P 500 has posted a daily return of positive 2.5% or greater on nine days this year including today (+2.7%), which is over two standard deviations from the average. In the prior eight times this happened in 2022, the index mostly fell the next day and gave up the majority of these gains over the next week. Heightened volatility clusters to both the downside and upside and the latter (e.g., today) is not indicative of a healthy market or investor confidence that the bottom is in.
Strategic Trade: Continue to stand aside for at least a day. I see no need to rush into positions. There’s a lot of room to roam in both directions, which means that once bulls or bears gain the upper hand and defend it there will still be tons of money to be made in that direction.
