Which is More Likely — SPX Over 4600 or Below 4200?



  • Top investors use probabilistic analysis to think through different scenarios to determine which appears the most likely.
  • By thinking through each of four potential future paths for the S&P 500, we can be better prepared for whichever scenario actually plays out in the coming weeks.

We are now in the seasonally weakest part of the calendar year. The summer doldrums often lead to a meaningful pullback in the third quarter, and 2023 has, so far, not disappointed by following the seasonal tendencies quite well.

The month of August saw leading names like Apple (AAPL) and Microsoft (MSFT) pull back from new highs, causing many investors to rethink the “2023 is going to go up all year” thesis. So now that we’ve experienced an initial drop, what’s next for the S&P 500?

Today we’ll revisit the concept of “probabilistic analysis”, where we lay out four different potential scenarios for the S&P 500. There are three things I hope you take away from this exercise.

  1. It’s important to have a thesis as to what you think will come next for stocks. This should be based on a meaningful combination of four key pillars: fundamental, technical, macroeconomic, and behavioral. And your portfolio should be positioned to reflect what you see as the most likely outcome.
  2. It’s also important to consider alternative scenarios. What if the market is way more bullish than you’d expect? What if some five-standard-deviation event pops up, and stocks suddenly drop 20 percent? The best way to break out of your predetermined biases is to actively consider alternative points of view.
  3. It’s incredibly important to think about how you would adapt to one of those alternate scenarios. How would your portfolio perform in a risk-off environment in the coming months? Are you prepared for a sudden spike in risk assets, and at what point would you need to change your positions to match this new reality?

I have found that the most successful investors don’t know all the answers, but they ask the best questions. So let’s broaden our horizons a bit, and consider four potential future paths for the S&P 500 over the next six to eight weeks. But first, we’ll review the recent pullback for the major equity averages.

A brief seasonality check on the S&P 500 will show that August and September tend to be quite weak for the main US equity benchmark. So the drop we saw in early August actually follows the seasonal playbook quite well, as would further weakness in September.

We’ve been thinking about the possibility of a much deeper correction for risk assets, and it’s a distinct possibility that we’re now in an A-B-C pullback, which would take us to a new swing low right around options expiration in the third week of September. But at the same time that charts like LVS are displaying classic topping patterns, we can’t help but notice that stocks like Alphabet (GOOGL) appear to be firmly entrenched in a protracted bullish phase.

An uptrend is defined by a persistent pattern of higher highs and higher lows, and GOOGL certainly seems to be displaying that classic bullish phase quite well. How bearish do you want to be when Alphabet is just pounding higher month after month?

With our benchmarks pulling back and breadth conditions deteriorating, as well as key growth stocks like GOOGL still holding above support, let’s lay out four potential scenarios for the S&P 500 over the next six-to-eight weeks. And remember the point of this exercise is threefold:

  1. Consider all four potential future paths for the index, think about what would cause each scenario to unfold in terms of the macro drivers, and review what signals/patterns/indicators would confirm the scenario.
  2. Decide which scenario you feel is most likely, and why you think that’s the case. Don’t forget to drop me a comment and let me know your vote!
  3. Think about each of the four scenarios would impact your current portfolio. How would you manage risk in each case? How and when would you take action to adapt to this new reality?

Let’s start with the most optimistic scenario, involving a strong summer push for stocks.

Scenario #1: The Very Bullish Scenario

What if the pullback of the next five weeks is over, and the market goes right back to a full risk-on mode? Stocks like AAPL and MSFT would most likely return back to test new highs and interest rates would probably come down enough, as economic data continues to show at the Fed’s efforts have successfully slowed down the economy.

This Very Bullish Scenario would mean a break above 4600, and when we revisit the chart in late September, we’re talking about the possibility of new all-time highs for the S&P 500 and Nasdaq in October.

Scenario #2: The Mildly Bullish Scenario

Markets can correct in two ways: price and time. A price correction (see February 2023) involves the chart moving lower quickly as the market quickly sheds value. A time correction (see April-May 2023) means there’s not much of a price drop, and the “correction” is more of a pause of the uptrend.

There’s a possibility that the July high around 4600 still holds as resistance, and a time correction keeps the S&P 500 in the 4300-4600 range. Keep in mind that there are plenty of opportunities for sectors like Energy to thrive in a sideways market, but the major indexes don’t make any headway in either direction.

Scenario #3: The Mildly Bearish Scenario

What if the A-B-C correction outlined above plays out, and the S&P 500 index pushes lower to retest the 200-day moving average? If interest rates remain elevated, and growth stocks continue to pull back, this would be a very reasonable outcome for the equity markets.

One of my mentors used to say, “Nothing good happens below the 200-day moving average.” The good news is the Mildly Bearish Scenario means we drop further from current levels, but still manage to find support at this important long-term barometer.

Scenario #4: The Super Bearish Scenario

This is where things could get really nasty. What if the market goes full risk-off, interest rates push higher, economic data comes in hotter than expected, and the Fed is forced to consider further rate hikes instead of debating when to ease monetary conditions?

This Super Bearish Scenario would mean the S&P 500 breaks down through 4300 and 4200, leaving the 200-day moving average in the rearview mirror, and in late September we’re debating whether the S&P 500 and Nasdaq will make a new low before year-end 2023.

Have you decided which of these four potential scenarios is most likely based on your analysis? Head over to my YouTube channel and drop a comment with your vote and why you see that as the most likely outcome.

Also, we did a similar analysis back on the S&P 500 back in June. The “mildly bullish” scenario ending up matching the market action pretty closely. Which scenario did you vote for?

Only by expanding our thinking through probabilistic analysis can we be best prepared for whatever the future may hold!



P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist


Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

David Keller

About the author:
David Keller, CMT is Chief Market Strategist at StockCharts.com, where he helps investors minimize behavioral biases through technical analysis. He is a frequent host on StockCharts TV, and he relates mindfulness techniques to investor decision making in his blog, The Mindful Investor.

David is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He combines the strengths of technical analysis, behavioral finance, and data visualization to identify investment opportunities and enrich relationships between advisors and clients.
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Market Breadth Continues Recovery; Watching the NVDA Effect on QQQ as Oil Heats Up

The dog days of August are mercifully over. And as Wall Street gets back to work, new trends are emerging which could influence what the stock market does for the rest of the year.

Here are the macro crosscurrents to sort through:

  • The Fed is on the bubble as some Fed governors want to pause the rate hikes, while others want to push rates higher;
  • The jobs market seems to be cooling;
  • The bond market is focused on inflation, but is off its worse levels as it ponders what the Fed will do next, whether the job market is going to get weaker, and whether the price of oil will upset the apple cart;
  • Stocks are working on putting in a credible bottom; and
  • The oil market looks set to erupt.

Altogether, these variables suggest the fourth quarter has the potential to be a potentially profitable quarter for investors who can discern where the smart money is flowing and successfully follow it.

Bond Volatility Increases as Data Shifts Rapidly

The bond market’s inflation fears eased over the last few weeks ,but the most recent round of purchasing manager data (ISM and PMI), suggesting festering inflation in the manufacturing sector, erased the glee generated by the apparent cooling of the jobs market via lower-than-expected JOLTS and ADP data, which was boosted by the rise in the unemployment rate and a tame payrolls report.

The U.S. Ten Year Note Yield (TNX) reversed its downward move toward 4% in response to the purchasing manager’s data, which was interpreted as a picture of stagflation. The yield is nervously trading between its 20- and 50-day moving averages.

Smart Money Roundup: Watching NVDA Effect on QQQ

Calls for the death of the so-called AI bubble may have been premature, although the jury is still out for the sector in the short-term. Certainly, the action in AI bellwether Nvidia’s shares (NVDA) is an important metric to keep an eye on.

The stock’s recent volatility suggests that investors are thinking about what comes next, although the company continues with its bullish guidance. On the other hand, the slowly developing downslope in the Accumulation/Distribution (ADI) line is cautionary, as it suggests short sellers are starting to bet on lower prices for the stock.  

On Balance Volume (OBV) is in better shape, which suggests that a sideways pattern or a steady uptrend is the most likely path for the stock after the consolidation. You can see the NVDA effect reflected in the shares of the Invesco Nasdaq 100 Trust (QQQ) which is also consolidating. Support for QQQ is at $370.

Oil is Getting Hot

Tech is consolidating, but the smart money is moving into oil. You can see that in the bullish breakout of West Texas Intermediate Crude (WTIC), which is now above $85. Recall my May 2023 article, titled “Never Short a Dull Market,”, where I predicted that tight oil supplies were in the works and that the odds of higher prices were better than even.

And that’s exactly what’s happened. In the last three weeks, the U.S. Energy Information Agency (EIA) has reported a nearly 30 million barrel drawdown in U.S. oil inventories. Moreover, there are two coincident developments unfolding, which are likely to further decrease supplies:

  • OPEC + is likely to maintain its current production cuts in place for at least another month; and
  • The U.S. is quietly refilling its Strategic Petroleum Reserves.

These two factors, combined with stable-to-possibly-rising consumer demand for gasoline, and perhaps a rise in demand for heating oil as the weather turns cooler, are likely to keep prices on an upward trajectory for the next few weeks to months, and perhaps longer.

Expressed in more investor-accessible terms, you can see the shares of the U.S. Oil Fund ETF (USO) have broken out above the $75 resistance level, with excellent confirmation from a rise in the Accumulation/Distribution (ADI) and On Balance Volume (OBV) indicators as short sellers step aside (ADI) and buyers move in (OBV).

The bullish sentiment in oil also includes the oil stocks including the Van Eck Oil Services ETF (OIH), which is nearing its own breakout. This is due to the rise in global exploration, which has been steadily developing over the last twelve months, but which the market has mostly ignored, despite CEO comments of an oil service “super cycle” unfolding.

Things are happening fast. Oil, tech, housing, bonds, are all making their move. What’s your plan of action in this market? Join the smart money at Joe Duarte in the Money Options.com. You can have a look at my latest recommendations FREE with a two week trial subscription. You can also review the supply demand balance in the oil market and what the future may hold here. And if you’re a Tesla (TSLA) fan, I’m reviewing some interesting developments in the stock, which you can review free of charge here.

Breadth Recovery Shows Staying Power

Last week, I noted the worst may be over in the short term for stocks, as the market’s breadth is showing signs of resilience. This bullish trend is showing some staying power, as the New York Stock Exchange Advance Decline line moved above its 50-day moving average while maintaining its position above the 200-day moving averages. Another bullish sign is that RSI is nowhere near overbought, which means the rally still has legs.

On the other hand, the Nasdaq 100 Index (NDX) ran into resistance at the 15,600 area, where there is a moderate size cluster of Volume-by-Price bars (VBP) offering a bit of turbulence, as investors who bought the recent top are trying to get out “even”. Accumulation/Distribution (ADI) and On Balance Volume (OBV), may have bottomed out, but are showing some short-term weakness.

The S&P 500 (SPX) is acting in a similar way, although it remained above 4500, but above 4350, and it its 20-day and its 50-day moving averages. ADI is flat, but OBV is improving as investors put money to work in the oil and related sectors.

VIX Remains Below 20

VIX has been a bright point in the market for the last couple of weeks, as it has failed to rally above the 20 area. This is good news, as a move above 20 would be very negative, signaling that the big money is finally throwing in the towel on the uptrend.

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

Liquidity Remains Stable

Liquidity is stable. The Secured Overnight Financing Rate (SOFR), which recently replaced the Eurodollar Index (XED) but is an approximate sign of the market’s liquidity, just broke to a new high in response to the Fed’s move. A move below 5.0 would be more bullish. A move above 5.5% would signal that monetary conditions are tightening beyond the Fed’s intentions; that would be very bearish.

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

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Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe’s exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

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