The S&P 500 (.SPX) tumbled in an unprecedented manner at the start of the year amid Chinese economic woes and risk of high yield.
Its sharp decline threatens the reversal of the secular uptrend via a head-and-shoulders formation. However, given the relative strength of the U.S. economy, the S&P 500 might, just might, be able to avoid the trend reversal.
Source: Thomson Reuters Eikon
The S&P 500 rose a whopping 220% from the bottom of Great Recession in March 2009 and a solid 99% during the long last leg of the uptrend since October 2011. After peaking in May, the index struggled to hold on to its lofty levels. It plunged in August at the hands of the Chinese currency devaluation, then struggled higher but failed to match the previous high.
The doji bearish reversal in November (on a monthly basis) was a good sign of the upcoming decline. Despite the recent weakness, it’s worth noting that none of the declines since the peak closed below 1,916, the 14.6% Fibonacci retracement of the March 2009 – May 2015 period. Nearby there is the neckline of the potential head-and-shoulder pattern at 1,889.
Thus, a close below this key area on high volume by the end of January would confirm the end of the uptrend and signal the acceleration of the recent decline.
In the short term, there are only puny signs of recovery. The chart shows a possible medium-term bottom formed on Jan. 11 and a potential bullish doji. The S&P 500 is significantly oversold, as defined by the spread between the last price and its 21-day exponential moving average. In previous instances, the index recovered at least three days when the spread exceed -40. However, nothing prevents the market from dipping even deeper before recovering.
It would take a close above 1,952, the 23.6% Fibonacci retracement of the short-term downtrend between Nov. 3 and Jan. 11, to open the gates to a test of the 21-day exponential moving average at 2,001.
