Why this chart watcher thinks the stock market’s year-end bounce is under way

According to JPMorgan technical analyst Jason Hunter, the S&P 500’s strong start to October was just the beginning of a rally that should last through the end of the year.

“When coming [economic] Data can change tone, recent price action and technical setup suggest the fourth quarter rally is underway,” Hunter wrote in a note to clients.

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The SPX of the S&P 500 Index,
-0.20%
a two-day rise of 5.7% through Tuesday, which was the best two-day start to a quarter in 84 years, triggered a “cluster” of momentum divergence buy signals. Given that these signals coincide with a “heavily oversold” technical and historically bearish sentiment, Hunter believes the rally may continue.

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Hunter believes the recovery could eventually push the S&P 500 back up to test previous resistance at the 200-day moving average, which many chart watchers see as the dividing line between longer-term uptrends and downtrends. According to FactSet, the 200-day mark extends to 4,199 on Wednesday, which is about 12% above current levels.

FactSet, MarketWatch

Meanwhile, the S&P 500 slipped 0.2% in afternoon trade on Wednesday, but erased an earlier intraday loss of up to 1.8%.

One reason for Hunter’s bullish view is that the S&P 500’s rally unfolded from readings of “deeply oversold internal breadth,” suggesting that the number of falling stocks relative to those rising has reached levels consistent with market rallies collapsed in the past.

Gail Dudack, chief investment strategist at Dudack Research Group, said just before the S&P 500’s big bounce that the 25-day up-down volume technical indicator had been at levels for 10 days associated with an “oversold ‘ condition, and was also at a more extreme oversold reading than the June low that preceded a two-month uptrend that sent the S&P 500 up 17%.

In addition, the AAII sentiment survey of individual investors showed that those who were bearish on stocks returned 60.9% for the week ended September 21, the highest percentage since the week of March 5, 2009, or just before the S&P 500 financial crisis reached its bottom.

And JPMorgan’s Hunter said the stock market is “ready to confirm a weekly divergent buy signal from Momentum (which) has historically had a good hit rate for the S&P 500 index.”

A bullish technical divergence refers to when prices continue to trend lower even after some momentum indicators, such as the Relative Strength Index (RSI), have started trending higher. The RSI is a widely used oscillatory indicator that tracks the magnitude of losses relative to the magnitude of recent gains. Read more about how to interpret RSI divergence.

The chart below shows what a bullish divergence looks like:

FactSet, MarketWatch

There was a similar divergence when the S&P 500 bottomed in 2009 after the financial crisis:

FactSet, MarketWatch

And another divergence when the market bottomed in 2002 after the internet bubble burst:

FactSet, MarketWatch

JPMorgan’s Hunter said he believes sustained daily closes above resistance at the Sept. 28 intraday high of 3,736 – the S&P 500 is expected to close above it for the second straight day – would keep momentum positive and target the next area of ​​resistance at 3,900 .

He believes the 4100-4200 zone, which the 200-day mark is likely to fall into in Q4, could act as a “significant barrier”.

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