To The Moon

The stock market is rallying for the second-straight session Tuesday, with the $S&P 500(.SPX)$ , $SPDR S&P 500 ETF Trust(SPY)$ , $Invesco QQQ Trust(QQQ)$ ,$DJIA(.DJI)$ gaining more than 1%.

Investors should keep a watch on $S&P 500(.SPX)$ 3,700 into the close, accordingto Citi. It has traded above that for most of the session, having bounced after a breach lower in midday.

"About a fifth of short positions are already in loss at 3,650, with more than half ($17bn notional) in the red if the market moves above 3,700,"Citi global head of quant strategy Chris Montagu and team wrote in a note. "This represents a moderate risk of a short squeeze for even a temporary rally from current levels. A squeeze could amplify any recovery rally near-term."

The S&P saw bullish flows at the end of last week, continuing a trend from early October, but overall positioning is still bearish, Montagu said.

"It is still early days to say if this represents a fundamental shift in sentiment."

Bank of America survey shows: Fund managers are completely flat, and U.S. stocks will rebound in the first half of next year.

Markets wailed as fund managers lost confidence as the Federal Reserve raised interest rates sharply and pessimistic expectations about the economic outlook, according to a Bank of America survey released on Tuesday. However, the bank noted that it also paves the way for a rebound in U.S. stocks in 2023. A shift in Fed policy over the next 12 months is increasingly likely, with 28% of respondents believing that short-term interest rates will fall during this period, and the share expecting rates to rise has fallen to 59%, the report said.

Technical Analysis: Equities Are Near A Temporary Bottom

Cited from Analyst Rahul Chahal,"We are near a temporary low for equities, though it might not be the low until a number of internals turn around."

For the past few days the S&P 500 has been closing just around 3600. Weekly charts are very important from an intermediate perspective. There are two main reasons for this from my perspective, based on technical analysis.

The first reason is that the S&P 500 is just above or around the 200 weekly moving average. This is closely followed by lots of institutions and investors.

The second reason is a 50% retrace of the up move from COVID lows to the January 2022 high for S&P 500 at 3505. It is possible for the S&P 500 to spike lower, but it is likely to close above 3550.

If you take the trade, then remain in the trade as long as the S&P 500 stays above 3500 and close the trade for a small loss if S&P 500 has a weekly close below 3500. However, if the bounce lasts a few weeks, then the S&P 500 could rally to the 4050-4150 zone.

S&P 500 weekly chart

There are a few divergences that I'm seeing. These divergences are the primary reasons I'm saying that we are near a temporary bottom from which equities could rally. The divergences are:

• $iShares iBoxx $ High Yield Corporate Bond ETF(HYG)$ is making higher lows while the S&P 500 is making lower lows on the daily chart.

S&P 500 HYG Chart

• The second divergence is visible on the daily chart. $Cboe Volatility Index(VIX)$ has not made higher highs in October 2022 compared to June 2022 level while S&P 500 has made lower lows in October 2022 compared to lows in June 2022.

S&P 500 VIX Chart

The article is primarily based on technical analysis, which I use personally to assess if a bounce is likely in a downtrend.

In the past 9 weeks, the $SPDR S&P 500 ETF Trust(SPY)$ has had a handful of positive days. The downtrend might make a temporary bottom, but to have a meaningful turnaround for equities, several headwinds will have to become tailwinds.