S&P 500 has been on a roller coaster ride since November 2015. First it meandered along for a while to close the year. Then it dropped like a rock to start 2016. Then, it staged a turnaround to recover the lost ground before getting into some headwinds. But, now it is forming a bullish flag⁽ⁱ⁾.

The October 2014 was a tumultuous month for the markets. That month witnessed many dramatic sell-offs and rallies driven by real and other global crises. U.S. let airstrikes in Syria, Hong Kong was engulfed by protests and Africa hit by Ebola. Along with these there were global economic concerns birthed by the fears that the U.S. Federal Reserve would raise interest rates sooner than expected. The result was that during the month, Dow Jones Industrial Averages fluctuated by more than 1,500 points during the month and the broader market index, S&P 500, by 197 points.

On September 15th, 2014, S&P 500 made a high of 2019.26, an all time intra-day high till then. Then it declined gradually to reach the two month low on Friday October 10th and closed at 1906.13. On the first three days of next week, S&P 500 breached the previous swing low and touched 1820.66 – a 9.85% fall from the all time high made only a month ago. Then, the market recovered and the week closed at the upper range making a hammer reversal pattern in the process. S&P 500, ultimately, closed October at an all time high close till then.

A catalyst for the strong October close was the stunning QE program announced by the Bank of Japan. The resultant market action created a floor that has acted as a very significant support level for many major global indices.

The indices that have generally held the October 2014 lows include S&P 500, Dow Jones Industrial Averages, NASDAQ Composite, Dow Jones US Total Stock Market Index, German DAX, Europe Stoxx 600, French CAC-40, Japanese Nikkei 225 and Shanghai Composite. S&P 500 and Dow Jones briefly breached that support level but then climbed up immediately.

Many other indices have since broken the support levels created by October 2014 lows. These include Dow Jones Transport Index, small-cap Russell 2000, broader NYSE Composite, London’s FTSE 100, Spanish IBEX, Italian FTSE MIB, Indian Sensex, Sydney’s S&P/ASX 200, Brazilian Bovespa, Canadian S&P/TSX, MSCI Emerging Market Index. Some of these have either climbed above or are at the October 2014 lows, though their breaks lasted for many weeks. These include Russell 2000, Dow Transport, NYSE Composite, FTSE 100, Italian FTSE MIB, Canadian S&P/TSX and Brazilian Bovespa.

With that background, let’s take analyze these and some other global indices to get a better understanding of their health and relative performances. In this post we are going take a look at S&P 500.

Weeklies Are Showing Horizontal Trading Range

During the past few months, major U.S. indices have generally performed better than global indices. S&P 500 and Dow Jones Industrial Averages have formed a horizontal trading range at the top bounded by 2015 high and October 2014 low. Within this, they have also formed another horizontal channel within a larger one.

S&P 500 cleared the resistance formed by the high of September 2014 in October ’14 and then reached all time high of 2134.72 in the summer of 2015. Since then it has failed few times attempting to go higher. It also tried to break the October ’14 lows but failed twice – once in mid-January and then in early February 2016.

One the weekly chart, the 9-Period RSI of S&P 500 formed few divergences since the summer of 2014. The downtrend line on RSI from July 2014 broke to the upside in February 2016. Generally, a break of a trend-line on RSI precedes the break of trend-line or pattern in the price. The RSI trend-line had previously broken in October 2015 and the price move following it stalled at a high of 2116.48 in early November 2015.

That rally faced stiff wind. First due to the Fed rate hike in December and then due to concerns about Chinese economy at the beginning of 2016. The result was a shard price decline that took the index below 2015-lows and then breached the October 2014 lows.

During the second week of February, S&P 500 attempted for the second time to break the support but failed. Instead the week’s action formed a Hammer pattern – a bullish candlestick formation. It was also a Wyckoff Spring pattern, another bullish formation. The RSI formed a divergence on close-basis. MACD (3, 10, 16) – fashioned after Linda Bradford Raschke’s 3/10 oscillator – histogram too formed a divergence with the price. The MACD Histogram was rising after mid-January lows and the MACD fast line was rising toward the Signal line.

All these indicators are bullish in nature. Subsequently, the price rose and cleared the intermediate high between the January and February lows, thus completing a double bottom pattern, by the end of February. That week RSI also broke the down trend-line. This RSI trend-line break took the price to 2111 by mid-April, which is slightly above the measured target of two-times the height of the double-bottom pattern. Since then the price has retraced to the 89-day SMA, another usual support level on weekly timeframe.

Daily Timeframe Is Showing Bullish Flag

The chart on daily timeframe gives us more clues. On it, the S&P 500 is forming a down-sloping flag from resistance formed by the November 2015 high of 2116. This is a bullish formation and usually resolves in the breakout to the upside. The flag has retraced 28% of its gain during the rally from February lows.

The three momentum oscillators – 9-period RSI, MACD (3, 10, 16) and Stochastic (13, 3, 3) – are all showing divergence at the low of May 19, 2016. By the close of Monday, May 23rd, the price is at the 20-Day SMA and 50-D SMA, which are acting as a resistance levels.

The three candlestick chart pattern – Wednesday May 18th to Friday May 20th – is a Morning Star pattern. This is a bullish reversal pattern. The price action on Monday was not decisive and the index made a spinning top Harami pattern. This shows indecision. S&P 500 can move in either direction but the probability is greater – based upon the bullish nature of recent patterns – that the next move will be higher.

A strong move above 2060 will be quite bullish as it will clear the resistance level created by the two SMAs and the high of Friday. The next resistance will be at the May ’16 high of 2085 followed by the April ’16 high of 2111. Last Thursday’s low was near the March 24 lows, which means that a potential double-bottom price-pattern is emerging. This pattern will complete if the S&P 500 breaks above the resistance level of 2111.

These emerging patterns and technical indicators divergences generally shape up to be quite bullish in a normal market environment. But the price-performance of many major global indices – mentioned at the beginning of this post – tell us that this is not a very normal market environment. Which of these indices will take the lead is not very clear at the moment. If S&P 500 or some other index with bullish formations takes the lead then other indices might follow it and break out of their patterns to the upside. If an index with emerging bearish formations takes the lead then S&P and other indices might break to the downside. In later blog posts we will analyze other indices.

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Note: ⁽ⁱ⁾ During a strong move – either up or down – continuation patterns like flag and pennant appear that mark small consolidations. A bullish flag is a rectangle pattern sloping down against the preceding rally. It usually appear midway of the overall move.