The year 2020 was a roller coaster ride for the world of Financial markets. Last year around the same time, a majority of the crowd was talking about how low this market can go, and now fast forward to present scenario where a majority of the crowd is talking about how high the market will go. It is funny but a proven fact (lesson) in the market that, “only one thing is certain in the market which is everything is uncertain.”
US equity market is leading the ongoing rally in the global equity markets and one of the major reasons behind the same is US federal reserve’s stimulus of $7.7 trillion. This has flooded the market with liquidity. As is regarded by many pundits, Liquidity is the “New Bull”. However, it is important to not to get carried away by the main stream media and be objective by banking more on the chart for the simplest reason that price is always supreme.
To further gauge the trend, lets dive into the major index of US equity market S&P 500, which is also the world’s biggest index in the form of market capitalisation.
As shown in daily chart above, prices are moving higher probably in the form Expanding Wedge pattern or a Megaphone pattern. This is a reversal pattern. What one needs to understand here is that we are discussing one of the probable scenarios. Price confirmation is yet to be received. And below are a few of the key observations to identify the same pattern.
Common Characteristics of Expanding wedge pattern,
- Looks like Megaphone shape
- Internal structure looks overlapping in nature
- Normally 3 to 4 touch points on both the lines
- Negative divergence on momentum indicators
Post pattern behaviour of Expanding wedge pattern is violent and normally we witness severe price correction. The beauty of a Wedge pattern is that it achieves the price target (from where the pattern started) in almost ¼ or sometimes 1/5th of time it has taken too form. For example, if it took 4 months to form an Expanding wedge pattern then normally it will only take 1 month or less than that to achieve the target. That is one of the major reasons why this pattern is a favourite among the traders.
In nutshell, S&P 500 is showing early signs of weakness and the trend is probably in the matured stage. However, it is always advisable to get a cluster of evidence before coming to any decisive conclusion. Major confirmation from price is yet to be seen. Only a break of the lower end of the trendline will validate the pattern and it will give us confirmation of the same. For now, one can stay cautious with their longs because it looks like next big swing is around the corner!