Market Overview

On Thursday, a decline which started at 1947 on the SPX broke the January 20 low of 1812 by a couple of points, and immediately reversed to finish on Friday’s close at 1864, with a 52-point bounce.Because of this being a potential double bottom, some analysts were quick to call this a bottom for the downtrend which started at 2116?Is it?

Maybe yes and maybe no!It all depends on whether the next few days confirm it.What would it take for a confirmation?Either to keep going and surpass 1882 after a minor pull-back, or to spend some time consolidating above 1812 and then resume the rally.The two currently carry about equal weight — if we have made the low, that is!Let’s consider the market position in detail so that we can be prepared for what comes next.

The case for additional upward progress is fairly good because the congestion pattern which has formed above 1810 is capable of higher counts, but probably not before a pull-back because a valid target to 1864 (1868?) — which is where the SPX closed on Friday — has already been reached.The next one could take us to about 1900.Beyond that, it becomes iffy and will depend on how the uptrend develops.

A case can also be made for a new low before a good counter-trend rally begins, for the following reasons:  Cycles should still be down until later in the month; there are valid projections to lower levels; the minimum downside target for the H&S pattern has not yet been reached!Not one of these is absolute, so it is possible that they will be completely ignored by the market if it has its mind set on staying with the double bottom formation.We just need to allow the next week or two to clarify if an intermediate low is already in place.

SPX Chart Analysis

Daily chart (This chart, and others below, are courtesy of QCharts.com.)

I have already mentioned that the index has reached its most logical price target from Thursday’s low. 

There are two immediate obstructions to its going higher:the strong overhead resistance created by last year’s 1868-1872 lows which is reinforced by the multiple short-term lows occurring last December at the 1972 level, as well as the pink 8-DMA which is currently just below 1870, whose effect on prices is better observed on a closes-only chart. 

On the chart, we can see that for a reversal to be confirmed, we would also have to break above the trend line from the 2082 level which is the principal trend line of this downtrend phase.On Tuesday, it would meet with prices at about 1882.A little higher, the index would also meet with the green 30-DMA which currently trades at 1910.In other words, it would take more concerted buying to push above all these overhead obstacles and confirm that an important reversal has taken place.As mentioned above, prices do not normally extend beyond such strong resistance without adequate preparation which can best be observed on the P&F chart as a pattern of accumulation which has enough of a count to suggest the rally has the potential for much higher prices.   As things now stand, even if the resistance is overcome, the rally would fail to reach beyond the 1947 top unless additional accumulation is created.