S&P 500 rallies at the start of the new month: is a bottom in place?

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October has started for only three trading days, and the US stock market is way off its lows. The main US indices rallied this week, despite the fact that this is the NFP week when markets typically move in tight ranges.

The first two trading days of the new month were particularly bullish. US economic data showed a potential softening of the labor market, which boosted stocks.

The idea is that faced with a slowing labor market, the Fed will decrease the pace of rate hike increases. Hence, that would be bullish for stocks.

Employment did come on the soft side in the manufacturing sector. Also, job openings declined sharply.

But yesterday’s private payrolls or the ADP data showed that businesses hired more than the market expected. Moreover, the ISM Services report for September, released yesterday, pointed to the healthy growth of the services sector.

In other words, yesterday’s data did not support the data released on the first two trading days of the week. Therefore, one may say that the market heads into the NFP report on Friday with a mixed set of data.

Nevertheless, stocks rallied yesterday too. After an initial decline, the main indices, such as the S&P 500 index, ended the day close to their daily high.

Naturally, the question on every investor’s lips is: do we have a bottom in place?

Stocks tend to bottom in September during midterm years

In midterm years, the S&P 500 tends to bottom, followed by strong seasonal strength in the last quarter. Moreover, in the first two trading days of October, the S&P 500 index gained 5.7%, which is the best start of a Q4 for the index in history.

S&P 500 resistance levels

Sure enough, the S&P 500 is in a bearish market, reflected by the series of lower lows and lower highs seen below. Also, while below the descending trendline, the bearishness should persist.

S&P 500 chart by TradingView

In other words, every rally below the bearish trendline would be interpreted as a bear market rally. Therefore, to overcome the bearish bias, the S&P 500 index must overtake important horizontal and dynamic resistance levels, such as 4000, 4200, and 4400.

In any case, the move from the lows is encouraging for bulls. If there was a time to add to risk in 2022, history tells us this is it.

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