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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:

a) Bullish:

  • Sideways Double Zig Zag (Flat correction):

SPX Monthly Double Zig Zag Chart
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  • Ending Diagonal:

SPX Monthly Ending Diagonal Chart
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b) Bearish:

  • Triangle:

SPX Monthly Triangle Chart
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  • Downward Double Zig Zag:

SPX Monthly Downward Double Zig Zag Chart
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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

  • In the weekly time frame we have two potential reversal areas the:
  • 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

SPX Weekly Chart
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  • 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 Friday'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.

SPX Daily Chart
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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

SPX Weekly Momentum Chart
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  • New All Time High of the SP 500 Advance - Decline Line:

SPX Advance-Decline Line Chart

However, although a breadth thrust is bullish for the equity market, an extreme reading is a double-edged sward since it is not sustainable forever. 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.

NYSE McClellan Oscillator Daily Chart

 

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