Rally and Retracement

The prior blog “Day of Decision  – 09/02/22” noted that the US monthly payroll report release on 09/02/22 could decide the near-term direction for US stocks. The reaction to the payroll report was bullish and the S&P 500 (SPX) climbed 1.3% above the 09/01/22 closing level.

  Then one – hour after the SPX 09/02/22 open, a top was made and for the rest of the session US stocks declined.  The SPX then retraced 97.7% of the  09/01/22 to 09/02/22 rally.  Was  the rally and retracement a  day of indecision?  Or  perhaps a decision in favor of the bears?  An examination of evidence from the momentum and sentiment dimensions reveals some fascinating  factors .

The daily chart courtesy of StockCharts.com examines  the momentum dimension.

This chart illustrates  the US new – highs minus lows (5 – day total; EOD)  symbol ($USHLD).

Note the bearish divergence in early January 2022 and the bullish divergence at the SPX 06/17/22 bottom.

The move up from 06/17/22  to 08/16/22  brought $USHLD to its highest  level in 2022. This  may not be predictive of further rally because in early April 2022 $USHLD exceeded the January 2022 high. What followed was the steepest part of the 2022 decline in US stocks.   

The $USHLD drop after the 08/16/22 peak is what’s interesting.  As of 09/02/22 $USHLD had retraced only 28.2% of the rise from 06/17/22 to 08/16/22.  The SPX over that time frame on an end of day basis (EOD) retraced 60.4% of its post 06/17/22 rally.  $USHLD should be at least matching the SPX retracement.  Underneath  the surface of  price, the $USHLD decline is weak. Implying  the drop from 08/16/22 is  only a correction within a post 06/17/22 rally that may not be complete.  

The daily VIX and SPX chart courtesy of Trading View illustrates evidence from the sentiment dimension.

When the SPX is making a significant  bottom it is usually accompanied  by the VIX making  a new high.  Occasionally the VIX will make a lower high as the SPX is making a  bottom, this divergence indicates a  lessening of fear – the bears are losing strength.

Note this phenomenon occurred at the SPX 06/17/22 bottom.  There was also a double divergence going into the SPX – May 2022 low.

So far the recent VIX high was on 08/29/22 three trading days before  the SPX 09/01/22 bottom On a shorter time scale there’s another divergence.  On 09/01/22 the VIX close was 25.55, on 09/02/22 VIX closed slightly lower at 25.46.  However, the SPX close on 09/01/22 was 3,966.86 on 09/02/22 the SPX closed at 3,924.27.  With  the SPX lower close on 09/02/22 the VIX should be rising.  That it went lower is  another sign the bears  could  be losing  power.

What about the time dimension?  September has started and as noted in several blogs September through October is  usually a seasonal bearish  time  for  stocks.

The 08/04/22 blog “Historic Stock Market Tops” illustrated that August to early September preceded some of the largest September to October drops in US stock history. 

The US stock market can continue to rise during September even within or just prior to a bear market.  The early October 2007 – SPX and Dow Jones Industrial Average  top is a good example.    In October 2007 the SPX declined 8% – not a huge  crash. The steep and powerful decline didn’t occur until September through October 2008.

If the US stock market is in a bear market that began in January 2022, its possible a bear market rally could continue into September 2022.  If the presumed bear market continues into 2023, perhaps a crash or mini crash could occur September to October 2023.

The US monthly Payroll report has frequently trigger large stock  market  movements.  The 09/01/22  blog “Day of Decision – 09/02/22” noted trendline and Fibonacci support at about 3,900 on the SPX.  The closeness of these two factors  implies  powerful support and it would require a powerful force to break that support. 

The  monthly payroll report could have provided that force.  The bears  had a chance to smash through an important support level and they failed. The initial move up on the report was  up big.  The bears had almost an entire session to break below the 09/01/22 bottom and failed again.

Another multi-week rally may have begun on 09/01/22.  The SPX Futures market has an abbreviated session 09/05/22 – the US Labor Day holiday.  There could be another blog posted on 09/05/22 depending on the action of  the US stock Futures.