According to JP Morgan technical analyst Jason Hunter, the S&P 500’s strong start to October was just the beginning of a rally that should continue through the end of the year.
“while coming [economic] Data could turn the tide, and recent price action and technical settings suggest a Q4 rally is underway,” Hunter wrote in a note to clients.
SPX of the S&P 500 index,
The two-day surge of 5.7% through Tuesday was the two-day start of the best quarter in 84 years, triggering a ‘cluster’ of momentum divergence buy signals. Given that these signals coincide with a “significantly oversold” technical condition and historically bearish sentiment readings, Hunter believes the rally could continue.
Hunter believes the rally could eventually lift the S&P 500 and test previous resistance at the 200-day moving average line, which closed at 4,199 on Wednesday, according to FactSet. , about 12% above current levels.
Factset, MarketWatch
Meanwhile, the S&P 500 fell 0.2% in Wednesday afternoon trading, but managed a 1.8% loss during the day.
One reason for Hunter’s bullish view is that the S&P 500 rally unfolded from the “oversold internal width” measure.
Gail Dudack, chief investment strategist at Dudack Research Group, said just before the S&P 500’s big rally, the 25-day up-down volume technical indicator was associated with 10 consecutive days of “oversold” conditions. I said it was on the level. The S&P 500 rose 17% before her two-month uptrend was more extreme oversold than its June lows.
Additionally, the AAII Sentiment Survey of Retail Investors showed that 60.9% were bearish on equities in the week ending Sept. 21. economic crisis.
JP Morgan’s Hunter also said the stock market was “poised to confirm a buy signal with divergent weekly momentum, historically a high hit rate for the S&P 500 index.”
A bullish technical divergence is when the price continues a downtrend after some momentum indicator, such as the Relative Strength Index (RSI), has started an uptrend. The RSI is a widely-supported oscillating indicator that tracks the size of losses relative to the size of recent gains. Read more about how to interpret the RSI divergence.
The following chart shows what a bullish divergence looks like.
Factset, MarketWatch
There was a similar divergence in 2009 after the financial crisis when the S&P 500 bottomed out.
Factset, MarketWatch
And when the market bottomed out in 2002 after the Internet bubble burst, another divergence arose.
Factset, MarketWatch
JP Morgan’s Hunter holds the daily close at 3,736, an intraday high on Sept. 28, while the S&P 500 tops it for the second day in a row, maintaining momentum and crossing the next resistance area at 3,900. I’m thinking of making it a target.
He believes the 4,100 to 4,200 zone, where the 200-day bar is likely to fall in Q4, could act as a “meaningful barrier.”
