The stalling out in the SPX weekly chart continues to suggest upside progress in December might prove more difficult than the normal bullish seasonality seen during most years. As has been discussed, the break of uptrends from October along with NYSE Advance/Decline uptrends are technical negatives. Additionally, the weekly Ichimoku cloud lies directly above near 4100 which should be resistance on any further gains this week. Moreover, cycles suggest a likely period of consolidation into Dec 21-23rd which should allow for some pullback in prices ahead of a final rally in the last week of the year. Overall, this remains a difficult spot to place big bets ahead of a very busy week of economic and political developments. My short-term analysis suggests a stalling out in this bounce into Tuesday/Wednesday at 4050 before turning back down. 3906 will prove to be important as support, and only if 4100 is exceeded will chasing this rally over the next few weeks prove correct. SPX above 4025 looks like a poor risk/reward.
SPX short-term pattern suggests resistance on gains Tuesday/Wednesday of this week
The short-term pattern remains bullish for a bit more upside progress into Tuesday. However, prices are quickly nearing areas of upside resistance, and exceeding 4100 looks difficult this week ahead of likely consolidation over the next 6-8 trading days.
Elliott structure clearly showed an impulsive five-wave decline into 12/7/22. The resulting bounce looks very “corrective” and shouldn’t retrace more than 78.6% of the prior decline before turning back lower.
Key resistance should materialize near 4035 in S&P Futures, while SPX cash has strong resistance between 4009 and 4031. Any decline back under 3933 would be a big warning towards additional weakness, with movement under 3918 likely leading down to 3833 or underneath to the mid- 3700’s area.
TNX looks to have surpassed its existing downtrend
One additional possible risk towards thinking Equities simply grind higher to finish out the next few weeks is the extent to which Treasury yields appear to be stabilizing and starting to turn higher.
Two areas are important directly above: First is 3.69%. Moving above this would raise the odds sharply of further yield gains to 3.91%. This latter level is a big area of resistance, which can’t be exceeded without expecting yields push back to new highs for 2022.
One cannot make the case just yet that a move back to highs is imminent. Wave structure could very well morph into a three-wave bounce followed by another five-wave decline lower ahead of a larger rally back to highs.
Overall, the near-term pullback from 4.30 down to 3.42% looks to have run its course, right at a 50% retracement of the rally off August lows. The shape of the resulting bounce will tell us more about the extent of an equity selloff given prior correlation trends between Treasuries and Equities. While many have argued this has gone by the wayside in few days’ time, any move back above 3.69% is viewed as a definite risk for Equities which could cause a reversal, specifically in technology stocks.
VIX moving up to multi-week highs warns of potential impending volatility
Interestingly enough, the last few days rally in SPX has directly coincided with a very sharp bounce in the CBOE Volatility index ($VIX) Monday’s lift carried this to multi-week highs, which might seem unusual given US Equity markets having continued the recent bounce.
Overall, it’s not necessary for VIX to have to fall just during negative sessions, and as we’ve experienced most of this year, the orderly pace of the decline has failed to coincide with much rise in implied volatility.
However, given the defensive nature of the market rally lately, while SPX lies directly below important resistance heading into a very eventful week news-wise, this rally in the VIX makes perfect sense. VIX often can turn higher ahead of markets turning down, or in the very least, often there are noticeable signs of positive divergence where the VIX does not follow Equities up to a final peak, but begins to strengthen ahead of stock indices falling.
Additionally the area near August and April was thought to represent meaningful support where VIX very likely might be expected to find support and stabilize. This looks to have happened this past week. Furthermore, the ratio between VIX and VXX (the volatility of the VIX) looks to be stabilizing also following a recent pullback. This lies right near important area of uptrend line support (Not shown) and could allow this ratio to start to turn higher over the next week as Equity markets reverse course.
Bottom line, analyzing the VIX technically often proves difficult. However, in this case, the act of having held former monthly lows and turning up sharply this week looks important, and very well could be signaling an upcoming period of realized volatility to match the move in implied volatility.
