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:

a) Bullish:

  • Sideways Double Zig Zag (Flat correction):

 

SP500 MONTHLY  SIDEWAYS DZZ

 

  • Ending Diagonal:

 

SP 500 WEEKLY ENDING DIAGONAL

 

b) Bearish:

  • Triangle:

SP 500 MONTHLY CHART TRIANGLE

 

  •  Downward Double Zig Zag:

 

SP 500 MONTHLY DOWNWARD DZZ

 

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

 

SP 500 WEEKLY CHART

 

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.

 

SP500 DAILY CHART

 

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

 

SP500 WEEKLY OSCILLATORS

 

  • New All Time High of the SP 500 Advance – Decline Line:

 

ADLINESPX

 

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.

 

McClellan Oscillator daily chart

 

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