The 2023 stock market rally surprised a lot of traders. Many have said this rally doesn’t make a whole lot of sense given the global environment. We agree. But then again, ever since the Fed turned on the money faucet in 2009 the markets have learned that downturns, big or small, are quickly turning around. So maybe it’s irrational exuberance or trained behavior. Also, between January 2022 and September/October 2022 the S&P 5oo (SPX?SPY) had lost about 25%. Reason enough to start rally with some legs. But who knew it would come this far this fast.
The Current Technical Picture of the 2023 Stock Market Rally
Looking at the 1-month chart of the S&P 500 below we can clearly see a deterioration of the trend starting in September of 2021 (first box left). In December 2021 our proprietary indicator ‘Long/Short Entry & Exit Optimizer’ then flags a market top and subsequently the market freefalls until June last year, with July marking the first solid uptick.
The indicator’s double-bottom formed between June and September 2022 (white line at the bottom of the image) marks the bottom of the market and an early signal to get back in. This is followed by a crossover and a retest in December, which presents a signal for a safe long entry in the market. And again, the trendline has not touched the signal line since November of last year. But resistance lurks at the 450 level, and with a Friday close of 443 we are just a hair shy of that mark.
We see a similar picture for the tech sector (QQQ), which has rallied even more since December, fueled by an AI mania that may take a breather soon like so many before it. Strong resistance lies here at the 370 level.
Where does the 2023 Stock Market Rally go from here?
So far the majority of the gains have been driven by the tech sector, and we don’t see a reason this would change anytime soon. Based on that, a look at the weekly chart of the QQQ reveals again a weakening trend and a clear signal to brace for lower levels with the recent retest of the indicator trendline (see big white arrow below). If you look at the circle marks before that you will see that every time a break and retest occurs, the market goes lower soon after.
We believe this time may not be different. How much lower it goes is anyone’s guess. Given the level of irrational exuberance, we say the QQQ could see 330/325 again and the SPY / S&P could go back to 415 and 4,150 respectively.
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