Stock-market Bulls and Bears Are at War Against Each Other Until 2023 as a Bearish 'doji' Pattern Forms on the S&P 500.

MA subtle undercurrent of bearish sentiment is emerging within a prominent U.S. index following a remarkable surge in performance. The S&P 500 is now within striking distance of a record high, last seen on January 3, 2022, while the Dow Jones Industrial Average has notched three consecutive all-time highs and set its sights on a fourth on the current Monday.

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Despite these impressive milestones, the S&P 500 has exhibited a potential warning sign through a centuries-old charting technique, suggesting a potential reversal in the prevailing bullish trend of this closely observed stock market index.

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Following a robust rally last Wednesday, fueled by the Federal Reserve's latest meeting, the S&P 500 displayed a textbook doji chart formation on Thursday. Subsequently, a similar but less-than-textbook doji pattern emerged on Friday. In candlestick charts, a form of technical analysis originating in Japan over 200 years ago, a doji pattern is often interpreted by market technicians as a harbinger of future market movements based on investor psychology.

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Doji patterns, resembling crosses due to their thin bodies reflecting close opening and closing prices, are characterized by equal-length vertical lines or "wicks" on either side, representing the day's trading range. MarketWatch's Tomi Kilgore has likened doji patterns to the moment when a ball freezes in midair just before descending, capturing the essence of a brief pause before a potential change in direction.

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These doji patterns, which translate to "at the same time," become significant after a substantial gain, akin to the robust rally witnessed last Wednesday, where the S&P 500 surged by 1.4% to reach 4,707, and the Dow Jones marked a historic milestone by breaching 37,000 for the first time in its approximately 127-year history.

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The significance of the doji lies in its ability to assist in gauging whether an asset is approaching its peak and is poised to reverse its gains, or if there is further room for upward momentum. According to Steve Nison, considered the person who introduced candlestick charts to the Western world, a doji appearing after an extended rally or in an overbought market may signify indecision and suggest a potential shift in market sentiment.

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While it's crucial to recognize that a doji does not guarantee a reversal in an asset's momentum, it provides insight into market psychology. Vladimir Ribakov, writing for the financial blog TradingBud, emphasizes that a doji pattern indicates a temporary balance of power between buyers and sellers, creating a state of calmness before a significant market move.

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The formation of two dojis in succession, as observed on Thursday and Friday in the S&P 500, increases the likelihood of a substantial move in either direction, according to Ribakov. While a powerful move may ensue, the ultimate outcome between bullish and bearish forces remains uncertain.

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Market optimism has been fueled by investors betting on the Federal Reserve not only halting interest rate hikes but also implementing significant rate cuts in the coming year. The Fed's dot plot, representing projections of rate cuts among its members, suggests the possibility of around three rate reductions, totaling at least 0.75%.

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The central bank's shift from rate hikes to a more dovish stance has contributed to a retreat in yields for benchmark bonds (BX: TMUBMUSD10Y), potentially leading to reduced borrowing costs that could support businesses. Investors appear optimistic that the Fed has successfully tackled stubbornly high inflation without pushing the U.S. economy into a recession.

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The tug-of-war between stock bulls and bears hinges on the Fed's ability to orchestrate a soft landing in 2024. While current indicators suggest favorable odds, a significant number of anticipated rate cuts in the coming year raise concerns about the underlying stability of the economy. The battle for supremacy in the stock market will ultimately depend on the resolution of these factors.