A Psychological Barrier at 4,000

There wasn't much excitement during the last trading week, the S&P 500 just moved sideways. As humans it seems that we like things that are simple and easy to process. Round numbers fall within that category, the Bulls struggled all week without much success to get past 4,000. It will be a resistance that a lot of people will be watching.

There isn't much change in the most important indexes, two of them are still in Bear Market territory (a loss of 20% or more from the previous high). We are about to enter an abbreviated week in observance of Thanksgiving. Black Friday is monitored closely by the Market players. If consumers spend a lot of money, it might be an indication of a profitable season for retailers.

Market Overview

I have repeatedly mentioned in my articles that the Bear Market isn't necessarily over. The structure of the weekly downtrend in the S&P 500 chart is completely intact (lower lows and lower highs, highlighted by horizontal solid black lines). The +1 Keltner Channel (KC) has been acting as a resistance during 2022 in the weekly chart (red arrows) and we are pretty close to that level in the current rally. The -3 KC, which is considered an oversold level, has been acting as a support that triggers a rally (green arrows).

If the Bulls are serious about damaging the structure of the downtrend, the index must rally and close decisively above 4,350. Right after Thanksgiving 2021 we had a sharp decline in the stock market when the Covid Omicron variant was detected in South Africa, acting as a powerful negative catalyst. Let's see if this year has any surprises during the abbreviated trading week.

One of the reasons I'm still not that optimistic about the current rally is displayed in the daily chart of the S&P 500. Only two times this year, the index was able to get to the +3 KC (considered overbought conditions, highlighted in yellow). On both occasions, the Bears responded with very sharp declines. Bulls are still able to generate rallies, but they can't hold them for long. If we add that to the psychological barrier that hasn't been broken at 4,000 (horizontal dotted black line), there would need to be a serious increase in demand to continue fueling the rally.

Reviewing the supply and demand through the New Highs and New Lows numbers, there is an even distribution of power between Bulls and Bears. Every trading day becomes another chance for the Bulls to start the next strong multi-month Bull Market, it hasn't happened yet and currently I don't see any evidence that it will happen next week.

Industries

The only Industry that keeps displaying some force and the potential continuation of its uptrend is the 'Construction and Engineering' Industry ($SP1500#201030). After 18 months moving sideways it finally broke out from its resistance levels and it hasn't pulled back yet. One strong Industry out of the 68 that compose the Global Classification Standard (GICS) is still a low number.

There are other Industries that could have a similar behavior in the next few weeks. I did open a couple of pilot trades in two of them (highlighted in yellow).

I continue to monitor on weekly basis the different Industries, they are an important clue about where to find the leaders of the next Bull Market. Some Industries will rally despite the overall Market conditions and that could happen weeks or months before the next Bull Market. Timing in the stock market makes a great difference between a profitable or a losing trade.

Scenarios

Scenario #1: Events like the announcement of the Covid Omicron variant in 2021 are impossible to predict. Considering only the information available through technical analysis, the most likely scenario is that the Market will continue its sideways movement. If there isn't a surprising event, the volume will be low towards the end of the week. The Market will keep looking for direction, it will give keep going slightly up and down until there is enough demand or supply that gives it direction.

Scenario #2: The second most likely scenario, from my point of view, is that we will see a pullback. The selling pressure during the year has increased dramatically when the S&P 500 daily chart gets to the +3 KC and we are about to get to that level. The NH-NL stopped being bullish, the 4,000 resistance seems to be strong. If the Bulls take too long to generate some serious demand in the Market, that is one more chance for the Bears to resume the downtrend with the amount of negative news invading the media.

Scenario #3: The most unlikely scenario is that the Bulls manage to get past the 4,000 level of the S&P 500 during an abbreviated week despite all the negative considerations mentioned in the previous scenario. Anything can happen in the Markets, but I do consider this scenario unlikely. In order for the rally to continue something needs to trigger the demand that currently doesn't exist. That demand needs to continue for several days, let's see if the next trading week brings some surprising positive news that can create this kind of bullish power.

Summary

The Bulls have gradually lost their power, the rally stalled, and we are moving towards an abbreviated week that will be monitored to see if the retailers are likely to have a strong sales season.

I have a few milestones in different timeframes that help me keep perspective about the Market direction:

• The daily chart needs to close and hold above 4,050. That level corresponds to the +3 KC of the S&P 500 daily chart. The previous two occasions when the index was at the +3 KC it had very sharp declines to oversold conditions (-3 KC).
• When the Bulls clearly cross that first milestone the next one is 4,150. That's a few points above the current level of the +1 KC of the weekly chart of the S&P 500. The +1 KC of the weekly chart of the index is where the weekly downtrend has resumed its course the last two times.
• The final milestone is 4,350 where the structure of the downtrend will be finally damaged.

If someone has the conviction that a rally is ready to go to the moon it first has to demonstrate that it can get past these important levels. A few months back some people thought that Bitcoin was headed towards a valuation of $500,000 USD. As I write this article (Nov/20/2022) the current value is around $16,700 USD after the collapse of FTX and it has never been worth more than $69,300 USD. Someday Bitcoin might be worth half a million dollars, but in the near future that seems unlikely.

We all have beliefs that can make us act in a certain way. Unfortunately, the Market doesn't care about what we think or do. I would rather trust my plan than my ideas, no matter how confident I am that they will be successful.