As 2021 wound to a close, the animal spirits that had become the stock market for much of the previous year were being broken. Then in Q1 the market itself broke. The recent decline was deep, but hardly brutal.
It could be the shot across the bow. The rally that began late in March will be watched carefully as it could be the relief rally that turns out to be a “sucker’s rally”. If this is the case, a lower-high is likely to develop in Q2.
Price is not seen as likely to surpass 4600 by much, if at all. A rally beyond that point could still fail as a double-top. To get the hallmark topping sequence where you see a high, big drop, lower-high before the large bear market sell-off, the market typically doesn’t retrace more than 60-70% of the decline off the record high.
S&P 500 Weekly Chart
Source: TradingView
It may take some time, too, for the turn to morph into an outright decline. The more drawn out it is, the larger the sell-off is likely to become. It’s better for markets to get their declines over in a sharp, painful fashion, not drawn out topping sequences that eventually lead to swift selling.
This may indeed be a new leg higher to a fresh record high, but it appears that as much as any time in recent history the backdrop is there for a major top to develop. If this turns out to be the case, then the entire year should be a volatile one, and offer traders lots of opportunities.
Trade Smarter - Sign up for the DailyFX Newsletter
Receive timely and compelling market commentary from the DailyFX team
