Briefly –
- S&P 500 recorded rallies recently.
- RSI confirms bullish divergence.
- The falling wedge setup bolsters the bullish narrative.
The stock market rebounded from its lows with a few days to go before we close the year’s initial half. However, the rebound appears timid at the moment, as the market explored the -20% threshold recently.
A 20% fall from the peaks marked the beginning of a bearish market. Rallies amidst bearish markets are often aggressive, painting the case that the bearish market concluded. That is what occurred within the past couple of days.
Stocks have rebounded from their lows, and S&P 500 reflects such cases. The index bounced back beyond 3,900 points with nearly vertical action. That comes regardless of the Fed Reserve’s hawkishness plus the market anticipating further rate hikes in all remaining Fed meetings this year.
So, should you or anyone consider buying S&P 500 at the moment? Or its time to execute short positions? Keep in mind that we are traversing a bear market. Let us dip deeper.
The Immense Bullish Divergence
S&P 500 welcomed 2022 at record highs. However, the index resorted to downtrends, losing more than 20%. Meanwhile, the Relative Strength Index diverged from prices during the phase. The RSI remains the most common oscillator within the monetary community.
Investors use the oscillator to identify false breakouts within the marketplace. Meanwhile, a bullish divergence emerges whenever the market hits two successive lower lows, and the oscillator fails to reveal similar actions.
The oscillator (RSI) is highly dependable when drawing trading decisions based on these two. That’s because it weighs several periods before plotting values, unlike price actions that consider the open candle.
Meanwhile, the Relative Strength Index presents a massive bullish divergence, accompanied by a smaller amplitude. However, that does not imply guaranteed reversal. Moreover, the series of lower highs & lower lows might easily continue, translating to a continued divergence between the market and the RSI.
However, it shows resilience and highlights short-sellers about increasing reversal risks. Another bullish setup emerged during the trading year’s first half – the falling wedge formation.
The market remains inside the two edges. Meanwhile, a daily closing beyond 4,000 and the topside trend-line suggests the pattern has concluded. Price action usually retraces nearly half of the decline following a declining wedge. Thus investors should consider a move beyond 4,250.