A market capitulation is widely anticipated in the past 3 weeks after S&P 500 Futures (ES) broke below the key support at 4100. Analogue comparison based on the market rotation out from the most defensive sector in 2008 in conjunction with the market structure was explained in the video at the end of the post, as one of the scenarios to form a market bottom.
Wyckoff Change of Character Rally in S&P 500
On 24 May 2022, S&P 500 had a bar tested the low of 20 May 2022, which was the key to anticipate an upcoming rally. Refer to the chart below.
The exhaustion of the selling momentum as indicated in the shortening of the thrust to the downside (annotated in blue arrow) followed by a successful test on 24 May 2022, which was a higher low with decreasing of supply, suggested a relief rally to test the supply zone between 4000-4100 (annotated as green line).
Yet S&P 500 broke above the supply zone last week and close at 4155 with strong momentum. The upswing (still unfolding) is considered as a Wyckoff change of character, which is the largest up wave in magnitude, suggested a change of the trading environment from the downtrend since April 2022.
Since S&P 500 committed above the axis line where the support-turned-resistance at 4100, the labelling of the price structure could be adjusted to a bullish scenario based on the Wyckoff trading method as explained in the video.
What To Expect for The Market Bottom Without Capitulation
Although the short-term direction of S&P 500 is up, it still does not change the long-term bearish price structure as detailed in the post yet.
Should the low on 20 May 2022 mark the market bottom, the price structure analogue from 2015-2016 as shown below is a good example to be referred to.
The chart on the right showed the price structure of S&P 500 from 2015-2016. Similar to 2022, Prior to the low formed by the selling climax (annotated as 1), there was a topping formation. The small accumulation structure (annotated as 1, 2, 3) projected a higher high target labelled as 4. However, in 2022 (chart on the left) the rally off the bottom at 3 in March 2022 only created a false breakout at 4. The strength of the rally was unlike 2015-2016.
The sharp fall from 4 to 5 tested the swing low formed at 1 while in 2022 S&P 500 broke the swing lows (at 1 & 3) and created a lower low at 5.
Last Friday, S&P 500 committed above the axis line at 4100 (at 6). Based on the similarity of the price structure between 2022 and 2015-2016, a test of the upper axis line at 4300 can be expected.
Should S&P 500 commit above 4300, this could be a sign of strength rally on its way to test the key resistance at 4600 followed by a shallow pullback. This is the anticipated bullish price action if the market bottom has been formed on 20 May 2022.
A failure and reversal at 4300 could see another range bound condition developing between 3800-4300, as shown below.
Market Breadth As A Leading Bullish Indicator
Apart from the anticipated price action, as shown above, market breadth should be monitored closely as it often leads the market indices both on the way up and on the way down.
As shown above in the market breadth using percent of stocks above 200-day average, the current market breadth touched the level formed in 2015-2016 (annotated in green lines) followed by a bounce up, which is the current rally.
It did not reach the capitulation level in 2018 and 2020, which is also another reason to pick the price structure from 2015-2016 as an analogue comparison.
Should the market bottom form on 20 May 2022 without capitulation, the market breadth is to move up and commit above 40 (circled in green), similar to 2016. Eventually the market breadth should move back above 50 when the market is back to uptrend. In order to have a healthy and sustainable uptrend, the market needs at least 40%-50% of the stocks to stay above 200-day average.
Capitulation Scenario Using 2008 Market Rotation As An Analogue
Since the current rally in S&P 500 is still in the early phase, a failure scenario as shown above could still lead to a market capitulation scenario before a market bottom is formed. Watch the video below to find out the capitulation scenario based on the market rotation out from the most defensive sector in 2008.
As the market dynamic is impermanent and changing from time to time, follow the price action from the market is essential while using analogue comparison to help interpreting the message from the market. Visit TradePrecise.com to get more stock market insights in email for free.
This article was originally posted on FX Empire
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