Three Charts Show That The Stock Market’s Recent Rally Could Continue Or Roll Over

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There was a tremendous amount of nervousness surrounding the stock markets even before Russia’s President Putin gave the order to invade Ukraine. With issues ranging from the Fed on the cusp of increasing interest rates an unknown amount due to higher than anticipated inflation to the pandemic’s lingering health care impact and economic complications to geopolitical issues (to put it mildly), investors are faced with a greater than normal wall of worry concerns.

One point to keep in mind is that when there are so many unknowns about the economy and the markets (vs. the typical number of unknowns) a larger number of investors than usual will turn to charts to help them invest.

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Recent rebound could stall

While the S&P 500 is down 4.7% for 2022, from its recent low of 4,171 on March 8 the S&P 500 has rebounded 8.9% to 4,543. Over the past six trading sessions it has broken back above its 50 and 200-day trading averages but stalled at its 100-day average on Friday (the right side portion of the graph below).

With its Relative Strength Index (the top portion of the graph) hitting 60.54, showing a bit of an overbought condition, it would not be surprising to see the recent strength come under some pressure.

Hitting a resistance level

Carter Braxton Worth is founder of Worth Charting and frequent CNBC guest. He follows the markets as a technician and was the Chief Market Technician at Oppenheimer, Sterne Agee & Leach and Cornerstone Macro for almost 20 years before recently founding his own firm. In a series of charts he emailed me on Sunday they show the S&P 500 coming up against the upper band of a downward channel.

To get back to the mid-point of the channel the Index would have to fall to about 4,200 and is exposed down to under 4,000. Carter wrote, “The rally is at a critical juncture and my hunch is to fade the recent one month rally. At the current level it could lead to overhead supply coming into play.”

Per overhead supply is, “when the price of the stock is sitting below the highest value. Investors bought shares at higher prices and are down in the stock. As the stock moves back up, these investors sell shares and limit the losses. These investors are looking for a move back to the peak just to sell. ,

But a short-term bullish pattern is also in play

There is one technical pattern that is bullish for the market in the short-term. Jim Cramer on CNBC sometimes highlights charts from the Fibonacci Queen, Carolyn Boroden. She uses the 5-day (blue line) and 13-day (red line) exponential moving averages to show upward and downward trends in the markets. When the lines cross it tends to show that the market has bottomed or topped and could reverse direction.

When the 5-day is above the 13-day (which it is now after crossing 8 trading days ago) the market is moving higher and tends to stay in that trend until the lines cross. The same goes for the downside. When the 5-day is below the 13-day the market tends to decline.

While the width or length of the lines on the chart do not indicate how much longer the move will continue, it is worthwhile to keep an eye on.


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