SP500 - Is rally over - for now?

US stocks have been on a tear for 6 months now. However with the extreme uncertainty in the Middle East and energy prices soaring, the headwinds have been building for a while.

Yesterday's sharp correction lower, followed a reaction to the prior week's sell-off which saw a decent 76.4% rebound. - The big question now is whether the larger rally is over, and if so do we head much lower. - Looking at the clues, the signs are increasing that the rally may be close to terminating. The chart below shows how the market has continually made higher reactions lows over the past 6 months, this continues to be the case, however if the price of the SP500 breaks the last reaction low from last week at 1294.4, then this sequence will be over. - In addition, price action since late December appears to have formed a 'Rising Broadening Top / Megaphone' pattern. These type of formation are often seen at trend ends (although they can be notoriously tricky to navigate as trading signals). Saying that however, the fact that this pattern is rising, as opposed to the more usual sideways, suggests to me that the underlying upward trend is probably very strong. Hence, I would suggest that a deep reversal lower is probably the less likely scenario, with any breakdown of the pattern seeing some further correction possibly to somewhere in the region of 1260/80 before a sideways ranging or sideways/upward ranging market starts to take hold. - If on the other hand 1294.4 holds, then it is quite possible that the trend is still up, or at worst market enters a prolonged sideways range in the low 1300s. - One can of course not rule out a much deeper retrace, but I think this would be more likely to occur after more prolonged topping action.

For the record, I last discussed 'Broadening Patterns' in light of the market last summer (See link here). This shows how difficult trying to identify and neccessarily make conclusions from these type of patterns is. Hence, I would be careful not to use the signals from Broadening pattern without looking at all other underlying factors and considering other alternatives.