Chart Of The Day: Why This S&P 500 Rally Might Still Lead To A Crash
Investing.com | Apr 18, 2018 10:01AM ET
Yesterday was a good day for US stocks. Equities continue to rise even as geopolitical risk hasn't abated after Saturday's airstrike against Syria, the looming potential that Russia may escalate the conflict, and an ever-expanding trade war with China, with a potential nuclear arms race between Saudi Arabia and Iran still simmering in the background.
Despite all this, the S&P 500 jumped higher on a Breakaway Gap—a bullish sign. At the same time, it completed a small H&S bottom since March 22nd, as it cuts through the 50 dma and closes above the 100 dma.
So why are stocks rising if risks still loom large? Investors, who seem to have developed armor-thick skin since the mid-2016 Brexit vote, have found something to hold on to that allows them to disregard the myriad and complex geopolitical hazards...namely earnings. Netflix Inc (NASDAQ:NFLX) surged after reporting that subscriber growth topped estimates, helping to drive gains in technology shares; UnitedHealth Group(NYSE:UNH) climbed as well after reporting strong results.
We recently wrote that the completion of the small H&S bottom puts into play a much larger, double-bottom, since the February low, whose neckline is at the 2,800 price level (red line).
While all this sounds very promising, there is an opinion that the trading pattern since the January 26 record has been in the shape of a Descending Triangle. That paints an entirely different picture.
A descending triangle emerges when selling steadily increases above buying. This can be seen on the chart, as sellers first considered the 2,857 levels to be overpriced and later thought this even about the 2,800 levels in late February and mid-March.
Buyers on the other hand, thought the index was under-priced only at the 2,575 level, both in early February and early April. Should this divergent outlook persist, the price would find a strong resistance at the triangle top, also a downtrend line, followed by a downside breakout, as sellers continuously think the price is too high.
A downside breakout would trigger stops for bulls. Once that demand dries out, bears would have nothing in their way to continuously drive down prices. Soon enough, former bulls would convert into bears, adding to the downward pressure, resulting in a much more significant correction for the benchmark index, something we haven't seen in a decade, since the financial crash of 2008.
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However, should the 2,750 level be breached, the bearish dynamic of the ascending triangle would be reversed, as bears would be forced to cover shorts, increasing demand. Once supply in those levels would be absorbed, nothing would stand in the way of bulls who would keep driving prices higher, toward the double bottom 2,800 level, neckline (red).
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