SP500 (SPX): The Jury Is Still Out
The Jury is still out on whether the February rally is a countertrend move or something bullish
Breadth indicators are suggesting that the odds of another major down leg are now less likely. Although extreme readings are poised to lead to a market pullback, this kind of strength is unusual during a bear market. Hence odds should favor a higher low in the next pullback.
Although we should not completely rule out the event of another lower low, it occurs to me that we could have the following scenarios:
- Sideways Double Zig Zag (Flat correction):
- Ending Diagonal:
- Downward Double Zig Zag:
The suggested scenarios presuppose that the rally from the February low will unfold a Zig Zag (The following pullback will establish a higher low). The issue is where the current up leg could top.
Given the extreme overbought readings price should be close to a s/t top
A) In the weekly time frame we have two potential reversal areas:
- T1: Range 2033 – 2044 (50 wma – January gap down). The January gap coincides with the 0.786 retracement of the decline from the November lower high
- T2: Trend line that connects the November – December 2015 lower highs = 2055 ish
B) In the daily time frame it seems more likely a pause in the range of the T1. In this target box we have the upper Bollinger Band, the January gap down and the 0.786 retracement. However Fiday´s Marubozu, which achieved an eod print above the 200 dma may be a warning of buying exhaustion. Usually a small range body follows a Marubozu. Same pattern that established a short-term top on February 2.
In the technical front I have to emphasis the bullish signals that make unlikely a major downturn from here.
- New Bullish cross of the weekly MACD with the RSI reclaiming the 50 line
- New All Time High of the SP 500 Advance – Decline Line:
However, although breadth thrusts is bullish for the equity market, an extreme reading is a double-edged sward since it is not sustainable for ever. Instead it increases the odds of a pullback. In this respect the McClellan Oscillator, which last week printed the highest reading since the 2009 low on Friday it displayed a negative divergence suggesting that buying momentum may start to subside.