Wait-and-See Mode
The S&P 500 rallied the last two days and I'm still not convinced that this time it will be different. I have stated in several of my previous articles that since Nov/05/2021, no rally has lasted more than four days. There's some hope that the Ukraine conflict could be resolved if Russia agrees to talk to Ukraine. Hopefully peace will come as the future of millions of people are at stake, unfortunately in terms of the Market, hope isn't a good strategy.
Market Overview
My main concern comes from the daily chart, certainly a two-day rally, where the S&P has closed at its highs is something I'll monitor. If we study the chart below we see that back in Jan/04 when the S&P got past the 4,800 level the index was almost hitting the +2 Keltner Channel Band (KC, green arrow) in a rally that lasted four days. Another four-day rally starts on Jan/28, this time it doesn't even reach the +1 KC (orange arrow) . In fact, the 30-day EMA (blue line) seemed to be acting as a resistance in that second rally.
There are two points in the current rally where I'll think it will face a lot of selling pressure. The first is at the 4,500 level (red arrow) where the 30-day EMA could again serve as resistance. The second is at 4,600 which is around the same level where the past rally stopped (red arrow). If the S&P 500 can't get past 4,600 decisively, then the Bulls aren't strong enough yet, in fact if the S&P fails to stay above 4,600 I'll start to monitor if the S&P goes below 4,100 again.
Try to imagine the next few bars if the S&P can't get past 4,600. It will look like a downtrend on the daily chart. Lower lows and lower highs. There is a hypothetical case drawn in the chart below through the black arrows in order to illustrate that downtrend scenario.
I have kept the weekly support/resistance lines at the same levels than the previous weeks 4,191 / 4,482 / 4,775 (daily chart in the screenshot below). The other lines are shorter-term support/resistance lines in order to understand the daily action.
The rally brought some bullish news in one indicator, the New Highs and New Lows (NH-NL). If you check the latest numbers (highlighted in red rectangles), the amount of New Lows in all the timeframes dramatically decreased. The New Highs didn't increase that much but at least this signals that the selling pressure could be diminishing in the next few days.
Industries
Reviewing the 68 Industries based on the Global Classification Standard (GICS) there are only four Industries where I see strength. Only 5% of the Industries showing strength is definitely not a bullish scenario.
Scenarios
Scenario #1: The most likely scenario from my personal point of view, is that the S&P might rally a day or two, but then the rally will stop below 4,600. Once there, depending on the level of demand it could start moving sideways, or if the selling pressure increases dramatically then the S&P will start declining. In this scenario, I'll stay on the sidelines waiting for more favorable conditions to go long.
Scenario #2: Another possibility is that the selling pressure increases to a point where it kills the rally right away in the first couple of days of the week. This wouldn't be hard to happen, if the news about Ukraine are negative, or some hawkish comment from a Fed official, bad news about the virus or the economic recovery and the S&P can start declining again.
Scenario #3: In the last scenario, the less likely to happen, the Bulls finally wake up. Some good news or expectations get discounted into the Market, the rally continues and it finally closes and holds above 4,600. I see this scenario the least likely because I can't imagine today many news that would cause that amount of demand to enter the Market. Maybe a quick and peaceful resolution to the Ukraine conflict. If this bullish scenario becomes a reality, then I would start opening new long positions.
Summary
The Market is not about forecasting the future but interpreting the charts. In all my articles, I give my personal interpretation of what could potentially happen. I don't have a crystal ball and no one can consistently predict the future. Have your plan ready, check under which Market circumstances it works best. Never open a position without knowing what are you going to do if things don't work as expected.
If you have a solid strategy to make money and it also includes strict risk management, Corrections like the one we are living shouldn't severely damage your account. In fact, once the Correction is over, whether it's in a week or a year, it will open good opportunities to profit if you preserved your capital.
Currently we see a rally, some relief in the selling pressure, but nothing we haven't seen before. If the Market rallies a couple of days it doesn't mean that Bears already lost control. I'll wait and see, looking for stronger evidence that this rally could become something meaningful. If it lasts more than four days and it's able to get past and hold above 4,600 then there is a chance this rally is for real.