This week scared the bejesus out of me. But the last two days really made all the difference to the outlook.
I came into October looking for a small bounce into resistance levels eventually to stabilize and hopefully rollover into November. However, the ferocity of the rally off of the 200 Week MA had me questioning many things, including my sanity. Why? Well, the initial bounce off 4200 wasn’t surprising, but the subsequent second day rally after the potential start to World War III caught me a bit off guard.
And then another day of rally. And then again after that. From what I understand, the rally was ignoring WW3 and focusing on the supposed death of inflation and expectation that the Fed pause/rate decreases were right around the corner (which really, in my opinion, is what the entire rally since October 2022 was built on). Then Thursday came and brought some reality checks back into the fold.
Apparently, the Bond Auction came at 1 pm and pulled the rug out from under the bulls. I won’t speculate or pretend to understand the actual implications of this auction as I am not knowledgeable in that subject. But the technical levels are what interest me. And the price action since that Bond Auction makes for a very interesting bearish potential next week and possibly the following as well.
I want to emphasize the action from the end of 2021 through the first week of February 2022. At the end of 2021 the market was successfully supporting at the 20 Week MA. The third week of January, however, saw a big red candlestick to break beneath this MA in a significant fashion. This was a clear change in momentum at the time. There was a swift move down and snap back rally up to retest the underside of the 20 Week MA (this is one of my favorite technical patterns, by the way).
There is now an uncanny resemblance in the action over the past few weeks. We had the support of the 20 Week MA since the rally began in March 2023 until the third week of September which saw that large breakdown beneath that average. We had the subsequent low test and bounce which took us all the way up to retest the underside of this MA on Thursday morning. What really is sticking out in my mind, however, is the picture-perfect drop from there to close the week with a very large wick on top with small green body. While the bulls eked out a gain, it is hard to say they got much out of it
The second significant price action I am observing is the interaction with the 4326 area. This was the August 2022 top. We had successfully escaped this zone on the breakout in June this past year and had tried to take off from here twice. The first time was also in June, when we had a red week and bounced all the way up to 4600 by late July. The second time was the August 2023 low in which we bounced to reach the September highs from which we have been pulling away from ever since. Now here we are again at this level and the action to reattain this level is nothing short of exhausting.
So the potential I am seeing and preparing for now is that we could retest the 4200 recent lows, but even possibly break beneath these previous lows as we did in February 2022. And if this happens, then there is a good chance of retesting 4100 where I’d expect short-term support.
And if we want to really get into bear porn territory, we could see a retest of that 200 Week MA which should be around 4000 by the time we head down there. But I don’t want to get ahead of myself because we need to see 4200 break first. I am ready for this scenario, however, rather than retest and rally of 4200 because this is a very big bullish failure on the weekly chart. Furthermore…
The Monthly chart shows a very clear lower high in September from which we have been successfully pulling away. Here in looking at the bigger picture, there is even more interesting spot to watch for. If we successfully break beneath 4200, we will also be breaking the ascending trendline from the Covid 2020 lows which we have faithfully built this entire rally on since October 2022 and March 2023. This would yet again be a hugely significant break of momentum.
To summarize, everything hinges on 4200. I’m trying REALLY hard not to just put out a post peddling bear porn but at the end of the day, everything I am seeing has this huge potential to the downside. The setup is there on the weekly and if the pattern on the weekly fails to hold support, then the monthly setup will also break down. We could look back and realize this was one massive bear rally (in which case I will dust off my old analysis I did last year).
Very glad this week turned when it did and now we have a real moment of truth leading into the end of the year.
