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Is the S&P 500 set to test the January lows?

While every traders should have the USD and oil on the radar, I feel this pattern on the US 500 is really interesting. There is clear symmetry with the set-up in July to November last year.

Oil
Source: Bloomberg

Here we can see a 14% decline in the index on both occasions, followed by a counter-rally into a key Fibonacci retracement area. The index then made a strong move higher in a bearish wedge pattern, showing eventual signs of exahustion as the daily ranges contracted. What’s interesting this time is we have seen price make a higher high in late April, but this was not mirrored in the RSIs, which made a lower high. This divergence can be one of the most telling signs of an impending reversal and clearly this has played out, with a corresponding move through trend support. The question now is whether we see a 14% lower like we saw in November 2015. My personal view is that the risks of a stronger move lower have picked up and I would be using rallies in the market to look at short positions. It seems highly likely from this set-up that the April high of 2111 is the high point.

It’s unclear what would drive a move into 1800 at this stage, but I suspect it comes from a sharp move higher in the USD (see the key technical set-up here) and its destabilising impact on China and other emerging markets.

AUM-US-500-050616-SML
Click to enlarge

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