S&P 500: Conditions For A Top – Week Starting 15th January (Technical Analysis) (SP500)

The S&P 500 (SPY) exceeded the 2023 peak this week and the reversal pattern pointed out in last weekend’s article failed. Technical analysis identifies what the major market-moving participants are doing. If they are on holiday, like they were at the December peak, the signals are less reliable.

This article will look at what the new highs mean for the S&P500 trend and what to expect around the 4818 all-time high. Various technical analysis techniques will be applied to multiple timeframes in a top-down process which also considers the major market drivers. The aim is to provide an actionable guide with directional bias, important levels, and expectations for future price action.

S&P 500 Monthly

Last weekend’s article pointed out the lack of a monthly reversal as the December bar closed near the highs. Now that a new high has been made, a reversal pattern can develop in a similar way to the December/January top in 2021/2022. A weak January bar needs to form for this to happen, firstly with a drop past the monthly open of 4745, and then into a close near the lows of the bar. The low is currently 4682 but it can obviously go lower – the lower the close, the better the signal.

The all-time high of 4818 is the next major level. Above that is “blue sky” where measured moves and Fibonacci extensions will act as a guide for targets. The first of those (the 1.618* extension of the July-October decline) comes in at 4918.

4682 is the first important support, then 4607. December’s low of 4546 is also relevant.

There will be a long wait for the next monthly Demark signal. January is bar 2 (of a possible 9) in a new upside exhaustion count.

S&P 500 Weekly

Last weekend, the weekly chart sported a decent looking reversal, but obviously participation and volume were lacking and the reversal failed. Volume in the week of the December peak was nearly half of this week’s volume.

This week’s bar is not bearish with a higher low, higher high and the highest close ever. Again, a reversal can develop with a failure at a further high, but there is a good chance it spikes above the 2022 peak of 4818 first.

Often when a market trades back to a significant top after a long decline, there is a sequence of failed dips, failed rallies and “messy” short-term action. Bears get excited when price turns down (a double top!) and bulls get excited when price turns up (a breakout!). It can feel like the market is playing games with both sides, but it is more likely just a consequence of indecision.

Rather than get involved in every twist and turn, waiting for a solid weekly or monthly signal is often more reliable.

• If the S&P500 closes above 4818 next week and there is a close near the high of the week, the odds are in favor of continuation and a break into the “blue sky” of new all-time highs. 4918 is the next target.

• If the S&P500 rallies either above 4802 or 4818 and reverses lower to close near the lows of the week, then we can start looking for a top. Breaking near-term support of 4682 would increase the odds that a major top is in place.

An upside Demark exhaustion count completed on bar 9 at the December high. It can still have an effect, but price action is needed to confirm any weakness.

S&P 500 Daily

The daily chart lets us look at the price action before and after the CPI release on Thursday. Clearly the release was front-run, with strong action Monday to Wednesday. The bars after the release were weaker – which is understandable given the CPI readings beat estimates – but new highs were still made and no solid reversal pattern was formed.

It is slightly baffling to see new highs made after the CPI beat, but trying to rationalize it too much won’t help your performance. Technical analysis identifies what traders are doing, not why.

4818 is the only resistance left.

The post-CPI low of 4739 is the first support, with the 20dma in close proximity. 4682-94 is major support.

An upside Demark exhaustion count will be on bar 6 (or a possible 9) on Monday which means there could be a reaction from Wednesday onwards.

Drivers/Events Next Week

The odds of a March hike actually increased at the end of last week and now sit at 77%. This was despite a raft of FOMC members pushing back on dovish expectations and hotter-than-expected CPI readings.

Perhaps the progress on Core inflation is encouraging the doves. Perhaps they are optimistic the two CPI releases before the March meeting will fall in their favor. Or perhaps they know something we don’t?! Regardless, it seems they won’t back off the dovish bets until they really have to.

Next week’s data is on the light side. Retail sales on Wednesday and Consumer Sentiment on Friday are the highlights, with Unemployment Claims on Thursday always a data point to watch.

Next week is the last chance the Fed have to get their message across before the blackout period ahead of the January meeting. There is a full schedule of speakers, although no mention of Powell. A hawkish tone is likely to continue, but without explicitly ruling out a March cut (and they don’t have to, yet), then markets may continue to ignore the rhetoric.

Earnings season continues next week. Citigroup (C) released a mixed report on Friday and plans to cut 20k jobs in the next two years.

Probable Moves Next Week(s)

The rally from the October low of 4103 looks set to continue and the price action could get erratic as it approaches the 4818 all-time high. This often happens when price returns to a major top after a large decline.

Short-term, I expect an initial spike above 4818 to fail, but then for a second attempt to develop from above the post-CPI low of 4739.

The weekly close will be much more important than any minor fluctuations around 4818 and I have outlined the conditions for either continuation or the start of a reversal earlier in this article. A confirmed breakout should continue above 4900 into a major top. A reversal could mean the top is already in and target 4300 in the first half of this year.

Given the strong trend and bullish reaction to CPI, there are better odds for continuation higher. A strong break above 4818 would force even stubborn bears to throw in the towel and create the conditions for an eventual top. I still think we will see a Q1 reversal and major move lower, but I would not fight this trend, yet.