Technical Update - S&P500 & Nasdaq: Bottom and reversal pattern indicates strong rebound in US equities
Kim Cramer Larsson
Technical Analyst, Saxo Bank
US Equities opened lower yesterday on back of CPI numbers and Jobless claims dipping below key supports. But buyers rushed in lifting the market throughout the session forming bottom and reversal pattern on the main Indices indicating strong rebounds. But how high will it move before it hits resistance?
At the open yesterday S&P 500 dipped just below 3,500. 3,500 is an important support level; it is the upper part of the consolidation/correction area from Q3-Q4 2020 and the 0.50 retracement of the 2020-Covid scare low to 2021 peak.
Buyers then took control throughout the session resulting in the Index to form a Bullish Engulfing candle for the day. Bullish Engulfing candle is a bottom and reversal candle which suggests S&P 500 is likely to bounce from here. Divergence on RSI and Volume bigger than normal there is support for the reversal scenario.
Key level to look out for is 3,678 i.e., the lower level of the GAP from last week and a close above the upper trendline in the falling channel.
If S&P 500 can close the gap i.e., a close above 3,727 there is upside potential to 0.618 retracement of September downtrend at 3,879. Resistance at 3,810.
If S&P 500 closes the week around current levels it is forming a Hammer candle on the weekly chart which indicates bottom and reversal. The Hammer candle is not the strongest signal however, and if S&P 500 closes below the 200 weekly SMA today Friday the Hammer candle has not materialized. However, there is divergence on RSI which supports the rebound scenario.
If S&P 500 fails to close the gap and the Index slides back below the low of yesterday 3,491, there is no strong support before around 3,200 which is the bottom of the consolidation area and the 0.618 retracement of the 2020-Covid scare low to 2021 peak.
First indication of that scenario to play would be if RSI closes below its rising trendline.
Even if we get a rebound to 3,900 the medium-term downtrend is not reversed. It would take a close above 4,120 to do just that.
Nasdaq 100 dipped below key support at 10,677 and the 0.618 retracement at 10,589. The Index is still below weekly 200 SMA but weekly RSI is showing divergence indicating a possible larger correction.
On daily chart Nasdaq closed just a few cents below the previous support at 11,037 and has formed a Bullish Engulfing candle similar to S&P 500.
Nasdaq is likely to continue its bounce to test the resistance at 11,272 i.e., the lower level of the GAP. If closing the gap resistance at 11,660.
If this rebound fizzles and Nasdaq takes out lows from yesterday at 10,440 the Index is set for 10K.
First indication of this scenario to play out would be if RSI closes below its rising trendline.
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