SPX S&P 500 Daily Chart; Island Reversal; Head and Shoulders (H&S); Jobs Report Aftermath

The stock market will continue absorbing the disappointing jobs report. Only 114K jobs are reported and prior numbers are revised lower. Strike one. The unemployment rate pops from 4.1% to 4.3% triggering the Sahm Rule that indicates a recession is at hand. Strike two. Wages drop to +0.2% on-month and +3.6% on-year. Strike three yer out! Inflation cannot exist without wages rising. Stocks tank. Thursday and Friday are Wall Street bloodbaths.

The island reversal pattern that Keystone has mentioned a couple times (scroll back to prior charts), plays out; it is textbook. You can see the gap-up in early June from 5380 to 5410 creating the start of the island. As time went along, the bulls kept partying on the island erecting Party Town. There is a coconut tree on the island that Keith Richards wants to climb. Nothing lasts forever, however, and the SPX receives a negative divergence smackdown as previously explained.

Price falls to the 5410 shoreline even wading into the water at 5400, but recovered, and then in the back half of last week, the SPX falls back through the gap to 5377 to start the Friday session. That is a textbook island reversal. Oliver's Army can finally escape the island.

While the S&P 500 was in party town on the island where Rock 'N Roll is King, a head and shoulders (H&S) pattern forms. The head is at, say, 5660 and the neckline is 5400, to keep the math simple, that is a 260 difference, thus, if the neck fails at 5400, the downside target is 5400 minus 260, that is 5140. The neck failed. There are gaps down there big enough to drive a truck through so they will need filled at some point forward (orange circle).

The SPX collapses on Friday, falling through the 50-day MA at 5449, to 5302 holding the psychological 5.3K support but more importantly, the 100-day MA support at 5307 held. This is a big number going forward because lots more downside is ahead if it fails next week. The 5300-5310 range is where dip-buyers started buying stocks with both fists. At the peak, you can see that price was elevated above the moving average ribbon and desperately needed a mean reversion lower.

Price tags the lower standard deviation band at 5355 so the middle band, that is also the 20-day MA at 5527, sloping downward, is an upside target when a relief rally occurs. When's that?

Price makes the lower low so the chart indicators can be assessed for potential positive divergence to call the bottom. Not yet. The green lines show that the histogram and stochastics are possie d ready to send price higher but the red lines show that the MACD and money flow are weak and bleak wanting more lows in price on the daily basis. The RSI is slipping away and remains in bear territory below 50% agreeable to more price softness.

The stoch's are oversold and agreeable to a bounce. The red line for the Aroon shows that all the bears, 100% of them, believe that stocks have nowhere to go but down. When the boat is fully loaded to one side, that is a contrary indicator, and actually bullish for the SPX in the daily time frame going forward. The Aroon green line shows that the bulls are in flight or fright mode, like a deer in the headlights, sitting at the 50% level not knowing where stocks are going next.

So that is a mixed bag. Looking at the SPX 2-hour chart, it is set-up with possie d so it wants price to bounce and rally in the VST. This bullishness can be married to the histo and stoch's above for a bounce in stocks on Monday or Tuesday. The MACD and money flow, however, want lower lows, so price would roll over again until a proper bottom can be placed with possie d in the daily time frame. A jog or two is likely needed for all the indicators to set up with possie d (up-down or up-down-up-down) so that is a couple-four days. The SPX will likely bottom in the middle or back half of next week in the daily time frame. You do not have to guess. Simply watch the charts develop and the possie d across all indicators will call the bottom.

Also remember, that even when the SPX stages its relief rally in the short-term time frame, the weekly chart has topped-out and the neggie d on that chart wants a multi-week down move to continue. Thus, the SPX will probably remain soggy next week until the bottom is placed in the days ahead, then a rally for a few days or week or so, but then price will roll over for another leg lower as the sick weekly chart re-exerts its influence (sell the rallies). Of course, happy talk from the Fed can always change the picture and the charts will then need a little bit of time to price-in the latest goose. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.