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.

SP500 update and Eurostoxx 50

The SP500 continued its recent bullish run and made a clear break Friday over the declining trendline that marked the top of a Falling Wedge pattern. Whilst I now favour gains in the weeks ahead, it is crucial that support at 1070-1100 holds. I remain slightly cautious, given the less than friendly fundamental backdrop, however it is often said that 'Markets climb a wall of fear'. - IF the SP500 can hold the crucial 1070-1100 area, then I fancy a test of the 100 day sma around 1128, which will also coincide closely with the June 1131 high. This 1128/1131 zone may prove to be a key pivot for the next couple of months...

I have also had a look at the Eurostoxx 50 chart. This is a cap weighted Index of 50 blue-chip stocks from within the Euro area. The top chart shows the past 2 years price action, I have also posted (bottom) a chart showing the past 20 years [to get some perspective]: - The price action shows a consolidation phase for almost the past year, which appears to have unfolded as a large Broadening (Expanding) Triangle or 'Megaphone pattern'.  Recent price action has seen a messy consolidation in the lower half of this pattern. This index has however now approached critical resistance, as highlighted by the 100 day sma, and the declining top line of a symmetrical triangle.- I believe a solid break over this resistance would favour a run up to the highs from Dec09/Apr10, on the contrary a failure to clear this resistance would not be looked upon too well and should see a drift or plunge back towards the lows of the past couple of months.
(CLICK ON CHARTS TO ENLARGE.)