2023-08-08

Today we’ll dive into an in-depth analysis of the S&P500 with some extra notes at the end on the cryptocurrency market. We’ll look at the potential weaknesses coming into the S&P500 and Nasdaq, and show you where the market is expected to go next.

The S&P500 has been on a steady upward trajectory since the start of 2023. However, there are signs the rally is getting tired. We’ll look at three strong reasons the market has topped, and five reasons to hunt for a price target.

First, let’s review the January Barometer. The common phrase about the January Barometer is that “as January goes, so goes the year.” The market has followed the January Barometer closely this year, but now it’s diverging away from the forecast.

The January Barometer suggests a pullback around this time of year. However, the market has continued to charge upwards, so it’s overdue for a correction. Read more on the January Barometer here.

1. Strong Market Structure Signal on the S&P500

At the bottom of the market, around October 2022, the market put in a powerful candle pattern structure. This pattern is called an outside-upside-key-reversal, also known as a bullish Key Reversal.

This pattern occurs when a bullish candle opens below and then closes above two or more candles. This signals a strong change of direction and reversal of market sentiment. After this signal came in, the S&P500 market headed into a strong bullish trend.

Now an opposite signal appeared in the market. An outside-downside-key-reversal. Also known as a bearish Key Reversal. This signals a weak market looking for a pullback.

Another valuable tool is the harmonic ABCD pattern. This is where the market price moves from A to B, then replicates the same percentage move from C to D. TRI teaches this concept as a part of the BOT trade setup in the TRI Level 1 School Program where you learn to trade that C to D move properly. You can use also use this harmonic trade setup as a powerful location tool and target signal in the market.

When markets reach the ABCD objective level, there is a high probability of a reversal. A variation of the BOT setup is the Alt ABCD pattern, which means the price can reach further extension levels before having its pullback.

In recent years, Brian discovered how chaos theory, a fascinating mathematical concept, can be applied in trading. Brian showed that you can use the chaos number—i.e. Feigenbaum’s constant (4.669)—as an extension number, and measure from the right side of a “W” pattern, you can predict where the market wants to go, and when it will want to pull back.

You can see on the Nasdaq, the market rallied right up to the Chaos level, and that’s where it put in the market structure bearish "M" pattern. This combination (or confluence) of levels suggests that the market wants to pull back.

An important step in a trade process is looking for indicator confirmation. Here we are looking at two momentum indicators, RSI and MACD. Here we can see a clear divergance in momentum. Momentum divergance is when price goes one way, but momentum indicators move in the opposite direction. When price makes higher highs but indicators make lower lows, this suggests a reversal is coming.

Pro Tip: When momentum indicators confirm market structure by moving through the midpoint, this ‘confirms’ the divergence and makes it valid. (You can see from the orange lines how momentum is breaking down forming a bearish “M” shape.

Based on these four reasons, we have several technical trading reasons suggesting a pullback is imminent. What is the potential market pullback if it reverses?

Confluence is a concept Brian and the TRI instructors teach in the TRI School. It’s when multiple indicators, patterns, and technical levels all suggest price will seek the same level. This confluence level becomes a magnet for the market and provides a strong entry or target location for trades.

In the TRI Level 2 program, students learn about W.D. Gann theories. This theory states that price likes to move to 50% of the entire range. To learn more about Gann theory, you can jump into the TRI School program.

The 200MA is a common trading tool traders for showing support or resistance in price. If the price is above the 200MA, it’s assumed to be bullish, and if the price is below the 200MA, it’s bearish. The 200MA acts as a magnet attracting price, so it’s a useful tool to reveal where price is about to go.

Since the end of 2022, the S&P500 has put in a huge market structure ‘W’ pattern. Wykoff theory suggests the market like to ‘check’ the mid-point of the ‘W’ and then continue its trend. To learn more about how a ‘W’ works, check out this blog on the anatomy of a 'W' predicting price action.

The VP and PoC also suggest the market wants to pullback. Markets range 70-80% of the time and trend 20-30% of the time. After a long period of trend, it’s natural for a market to pullback or range. During a ranging market state, the price pulls back, fills in the VP, and price has time to set up the next big move.