Goldilocks and the Three Bearish Stock Indexes

• The December S&P 500 futures contract posted a bullish reversal pattern during Monday's session, indicating its short-term trend had turned up. 
• What made this more interesting is Wednesday's scheduled interest rate hike announcement by the US Federal Reserve, with the only question being how much. 
• Longer term trends remain down, with plenty of room for the S&P to move lower through next June (possibly). 

I had a question come in Monday afternoon asking if December S&P 500 futures (ESZ22) had posted a bullish key reversal on its daily chart. Over the course of the day the ESZ took out last Friday’s low of 3,853.00 on its way to 3,846.25 and eclipsed last Friday’s high of 3,905.00 as it raced to 3,936.25. The short-term reversal pattern was completed when the ESZ closed higher for the day at 3,917.25. Additionally, this bullish key reversal coincided with a bullish crossover by daily stochastics (a short-term momentum study) below the oversold level of 20% so a new minor (short-term) uptrend was both signaled and confirmed at the same time.

If the minor trend has turned up, then from a technical point of view the initial upside target for the ESZ is near 4,037.00. This is the 38.2% (Fibonacci rather than Dow) retracement level of the previous minor downtrend from 4,345.75 on August 16 through Monday’s low. However, with the US Federal Reserve set to make its next interest rate hike announcement Wednesday we have to keep the Goldilocks Principle in mind.

Those of you who have been following along with my analysis and commentary through the years will likely recall the Goldilocks Principle says, “Daily charts are too hot, monthly charts are too cold, but weekly charts are just right.” I’m sure you also remember I’ve been bearish all three major US stock market indexes since long-term reversal patterns were completed this past January:

• The Dow Jones Industrial Average ($DOWI) posted a bearish key reversal
• The Nasdaq ($NASX) took out its previous 4-month low during January, a momentum-based reversal pattern
• The S&P 500 ($INX) established both a key bearish reversal AND a new 4-month low to get 2022 started off with a bang

Applying the Goldilocks Principle gives us: 

• Short-term uptrends on daily charts 
• Long-term downtrends on monthly charts

But what about intermediate-term trends on weeklies? A look at the ESZ chart show me a downtrend that began with the bearish spike reversal the week of August 15. This study gets more interesting when we look at activity over the previous two weeks with the first being a bullish key reversal (week of September 5) followed by another bearish outside range last week. Usually in such cases I apply the Wilhelmi Element and focus on weekly closes only, which in this case again brings me to the conclusion the intermediate-term trend remains down. 

Some folks, let’s call them day traders, might’ve bought ESZ near Monday’s close in anticipation of a short-term bullish turn. If so, those same folks have been welcomed with a Turnaround Tuesday selloff down to 3,859.00, with sell-stops possibly sitting below Monday’s low of 3,846.25. Additionally, we have the US Federal Reserve set to make its next interest rate hike announcement Wednesday, so short-term bets on the ESZ could fall along the line of: 

• Long in anticipation of 100-basis point jump
• Short in anticipation of a 75-basis point hike

In the end I don’t think it will matter based on the downtrends seen on both the weekly and monthly charts, but that's what makes markets. 

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