The S&P500 index has been showing a clear bull trend for the past few weeks. However, as the "V" shape recovery takes place, we witness a weakened bullish momentum, and a probability for a corrective trend to take place. In this analysis, we explore the bullish and bearish technicals to determine the probability of a correction.
Bullish Evidence
- First of all, it's important to note that we have broken through the descending trend line resistance, marked in the dotted red line - In doing so, we have created what looks like a reverse head and shoulders pattern, a bullish reversal pattern - The Relative Strength Index (RSI) shows a clear uptrend, with higher lows - And the Moving Average Convergence Divergence (MACD) still demonstrates bullish histograms after a golden cross
Bearish Evidence
- However, based on Elliott Wave counts, there is a probability for a corrective trend to take place - We have seen a clear Impulse Wave count (12345), and are expecting a Corrective Wave (ABC) to play out, possibly down to the 0.618 Fibonacci support - The MACD is looking for a death cross, with decreasing bullish histograms - It's also important to note that while we have been in a bullish trend for the past few weeks, the EMA (Exponential Moving Average) Ribbon has not converged yet - Thus, solely based on the EMA Ribbon, it's too early to confirm the continuation of a bullish trend - Moreover, we are not only testing the upper Bollinger Band resistance, but the band width is also narrowing - The narrowing of the band width usually occurs before a big move
Market Sentiment:
Surprisingly, the market sentiment still remains at fear, as we are at 44 on the fear and greed index. This indicates that the market participants are cautiously bullish.
What We Believe
We believe that a correction is highly probable, based on Elliott Wave counts, and a number of other bearish indicators. However, should we see further bullish momentum from this point, it could serve as a confirmation for a continuation of a bullish rally.