With the recent rally showing increasing signs of exhaustion and the market topping, traders have begun to wonder if the S&P500 will suffer the same fate in the coming months as it did in August 2015, and - more apropos - in December, when the S&P failed to make a new high before starting a more significant correction leg into January.
Two technicians who are convinced this is precisely the case, are UBS' Michael Riesner and Marc Muller, who say that after hitting the April 20th reaction high at 2111 and seeing initial weakness, they see the SPX moving into a minor trading low late last week as the basis for a short bounce into mid-May. From a price perspective this move should either make a lower high or best case re-test the April 20th high before seeing more significant weakness into the June/July time window. In other words, at least according to UBS, the market has at most 3-4 weeks before the next major swoon lower.
Here is what else the UBS duo expects:
With last Friday’s reaction low at 2039, we have growing evidence that our suggested minor trading low is in place, which in this case would represent a new pivotal support. On the indicator side, our fast momentum indicators have started turning bullish on oversold territory, which is normally the confirmation that a trading low is in place/forming. On the sector front, we have several key sectors siting on important support levels and on the sentiment side the AAII Bullish Consensus at only 22% has hit a quite low level. Although the neutral camp in the AAII survey is still quite elevated, such a low bullish consensus is usually the basis for a bounce.
However, our medium-term view has not changed. We continue to think that a potential bounce would be limited in price and time and actually just part of a distributive top building phase and complete our anticipated early Q2 top, which in more and more markets globally (Europe and Asia) is already in place.
On the sector side, we have seen particularly last week initial trend breaks/significant weakness, where a bounce into next week in technology, financials, biotech and Russell-2000 should only post a lower high, as the setup for more weakness. On the other hand we see strength in commodity themes as a sell on the back of our suggested USD rebound scenario into summer.
Together with intact sell signals in our daily trend work and in our weekly momentum indicators, we think a bounce into next week can have the same character as in December, which failed to make a new high before starting a more significant correction leg into January.
Conclusion: From a cyclical aspect, the Friday reaction low at 2039 represents a new pivotal support, which makes the 2039/2033 support zone and the VIX breakout level at 17 an even more significant breakout level. With a bounce into next week we can see a re-test of the April 10th high at 2111. On the downside, a break of 2039/2033 would give us clear evidence that our suggested early Q2 top is in place with initial support at 1990 to 1950 into June and more significant weakness into July.