The S&P 500 (SPY) experienced a remarkable 16.8% rally within 42 sessions, reaching its peak on 27th December. However, this exuberance was accompanied by excessively optimistic expectations, with markets assigning a 73.8% chance of a 25bps cut in the March FOMC meeting and a dubious 16% chance of a 50bps cut according to the CME Fedwatch tool.
The recent significant decline marks the largest drop since the beginning of the rally, causing a retreat from dovish bets. The likelihood of any rate cut has receded to approximately 65%, and the strong Non-Farm Payrolls (NFP) report on Friday could potentially lower this further in the coming week, particularly with the pivotal Consumer Price Index (CPI) release looming.
This article aims to explore the potential extent of the market decline and assess the likelihood of the S&P 500 reaching new all-time highs above 4818. Various technical analysis techniques will be employed across different timeframes in a top-down analytical process, considering the major market drivers. The objective is to provide an actionable guide with directional bias, critical levels, and expectations for future price action.
Assessing the S&P 500 on a Monthly Basis
The S&P 500 reached its peak in December at 4793, just below the historic high of 4818, which serves as a prominent resistance level. While some may speculate a double top formation, there are no evident signs of a reversal from the December peak. The robust monthly closure typically indicates the potential for further highs, reminiscent of the situation following the July peak last year, as opposed to the reversal observed in January 2022.
The all-time high of 4818 presents a critical milestone, beyond which lies uncharted territory where measured moves and Fibonacci extensions will provide guidance for future targets. The initial marker, the 1.618* extension of the July-October decline, stands at 4918.
On the downside, 4607 emerges as the primary support level, with December’s low of 4546 also holding significance.
Another noteworthy point is the anticipation for the next monthly Demark signal, with January currently positioned as bar 2 in a potential 9-bar upside exhaustion count.
Evaluating the S&P 500 Performance Weekly
The weekly chart presents a more bearish outlook compared to the monthly perspective, particularly in the near term. Analysis from previous publications tracked a Demark exhaustion count, culminating in the December peak at bar 9. Additionally, a weekly reversal pattern, characterized by a narrow range candle followed by a gap and subsequent movement in the opposite direction, has emerged.
Turning to support and resistance levels, the chart shows upcoming barriers at this week’s high and the gap at 4754, followed by 4793 and 4818. Notably, the price is retracing along the extended breakout from the December FOMC weekly bar, with potential support identified at the bar’s low of 4593. The range of 4593-4607 presents a robust support area, as evidenced by the well-developed volume profile.
The completion of the upside Demark exhaustion count at the December high has commenced exerting its influence, while a new count is yet to initiate.
Analyzing the Daily Performance of the S&P 500
The ascent to the 4793 peak converges just below a major resistance level, indicating potential signs of the rally’s culmination. Furthermore, this descent marks the most pronounced decline since the October 27th rally commenced. Notably, pivotal supports such as the 20-day moving average and the 4694-97 area have been breached.
The conclusion of the October-December rally could trigger a substantial retracement, setting the stage for a subsequent upswing to eventually surpass the 4818 threshold at a later date.
The potential resistance levels ahead are at 4710-15, with 4754 marking the higher timeframe references. Minor support is identified at 4643, the origin of the December FOMC rally, while the range of 4593-4607 assumes a more substantial level of support.
The commencement of a downside Demark exhaustion count on bar 5 (out of a possible 9) suggests a potential reaction from Thursday onwards.
Upcoming Market Drivers and Events
The recent NFP report exceeded expectations on all key metrics, indicating a persistently tight labor market that is gradually returning to normality. This data contradicts the narrative of a strained or decelerating economy, which formed the cornerstone of the Fed’s dovish stance during the December FOMC meeting. Without evidence of economic slowdown, the trend of disinflation assumes heightened significance.
The upcoming CPI release on Thursday occupies a critical position. Analysts anticipate a 0.2% month-on-month figure, projecting a year-on-year increase to 3.2%. Core CPI is expected to exhibit moderation, reaching 0.2%. Additionally, the release of the Producer Price Index (PPI) data on Friday is scheduled to provide further insights.
It’s worth noting the potential significance of January’s data; the previous year witnessed a clear upturn in the economy at the beginning of the year, culminating in an exceptional NFP report on 3rd February. Market sentiments at that time leaned towards a Fed pause, but the robust data catalyzed four subsequent rate hikes before the eventual pause in August.
Recent data has portrayed a robust economic picture, and a recurrence of last year’s scenario could lead to a hawkish January FOMC meeting, subsequently reducing the probability of a rate hike in March. The May 1st FOMC meeting might emerge as a more probable starting point for an inevitable easing cycle.
Projected Market Trajectory in the Near Future
The technical analysis suggests that the rally, commencing from the October low, potentially concluded at the 4793 high on 27th December. Moreover, the excessively bullish expectations are currently undergoing unwinding.
However, the apparent market peak does not necessarily indicate the termination of the upward trajectory; it can be viewed as one segment of a larger sequence. A retracement of the rally could pave the way for another surge, eventually breaching the 4818 mark later in the year. Furthermore, the absence of a monthly reversal lends support to this viewpoint.
In the short term, a correction is expected to target at least 4593-4607 over the upcoming weeks. This presents a potential buying opportunity for a substantial upward swing. Nevertheless, it is plausible that the S&P 500 might regress to the 4300 area, or even lower, in the latter half of the year.
The initial phase of the upcoming week might witness stabilization and a minor rebound; however, surpassing 4754 seems unlikely unless the CPI release significantly underperforms expectations. Anticipated tests include 4643 and 4607 in the event of a robust CPI print.
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