S&P 500 Bullish Divergence

Last September, I called the S&P 500 index to lose 30% according to the projection based on a comparative analysis.

The index price was at $4,459 that time. The deepest valley since then was established at $3,637 last month. 18% of the index value evaporated since the idea had been posted and 25% from the top of this January ($4,819).

The majority of you voted for 10%-20% retracement and this was the closest call so far as we cannot be sure whether it is over or not.

To remind you, I had put together two ETFs and the S&P 500 index (black). I chose Vanguard Value Index Fund ETF (VTV) (red) and Vanguard Growth Index Fund ETF (VUG) (blue). Let us check the updated comparison chart below.

SP500 VTV VUG Comparison Chart

Source: TradingView

The bearish alert appeared to me when the value stocks (VTV, red) stopped contributing to the rise of the broad index. Moreover, the gap between the latter and the growth stocks (VUG, blue) has widened tremendously.

The retracement targets for VUG and the S&P 500 were based on the corresponding level of underlying / less performing instrument: for VUG it was the S&P 500 and for the S&P 500 – VTV.

It is amazing how accurately the VUG target at $217 was hit last month as the ETF dropped even lower in the valley of $213. The concept played out precisely as the VUG bounced off the broad index, blue bars approached but did not overlap black bars.

The S&P 500 index almost closed the gap with the VTV last month, however the VTV itself also dropped and hence wasn’t caught up. The retracement target has been set at $3,200 last September and the lowest level has been seen since then was $3,637 last month.

Let us look at the S&P 500 chart below to see what could happen next.

SP500 Weekly Chart

Source: TradingView

The price has shaped a familiar model of the Falling Wedge (purple) within the current retracement. The amplitude of fluctuations decreases as the price approached the apex of the pattern.

The RSI indicator has already built the invisible Bullish Divergence as it can be seen only through its readings: 30.2 vs. 30.5, which means higher valley versus the lower bottom in the price chart.

This combination of narrowing trendlines and bullish diverging indicator could result in the possible breakup anytime soon. Would it be a reversal or a dead cat bounce?

I added two paths on the chart. The red zigzag shows how the Falling Wedge would play out in the first place. The target (purple flat line) is located at the widest part of the pattern added to the breakup point. It coincides with the 61.8% Fibonacci retracement level at $4,367. It could be a double resistance.

The following drop should complete the complex correction down to $3,185. This target was calculated by subtracting the size of the Falling Wedge from the target of that pattern. And again, this area corresponds amazingly with the 61.8% Fibonacci retracement level and the first chart target based on a comparison with VTV.

The green path implies the sideways consolidation that should keep within the existing range of $3,637-$4,819.

Which way do you think the S&P 500 will go?

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Intelligent trades!

Aibek Burabayev
INO.com Contributor

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.