Here’s a silver lining for the impending stock market crash

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The S&P 500 collapse with peak volume on June 13, 2022 followed by a weak rally after the Fed’s FOMC pointed to the bearish scenario. The current market development is similar to the 2008 global financial crisis in terms of price structure and market rotation sequence, as explained in the video at the bottom of this article.

Using the Wyckoff method to spot the silver lining

After a decline of more than 10% in 6 trading sessions, S&P500 is just at a vulnerable spot where a stock market crash could easily be triggered. Over the weekend, Bitcoin broke below the support at 20,000 suggesting a continuation of the risk-free mode in the week ahead.

However, there is always a silver lining for the impending stock market crash when adopting the Wyckoff trading method to spot telltale signs of a potential short-term rally. Refer to the table below.

Since breaking short-term support at 4080 on June 9, 2022, a shortening of the downward thrust was observed (as annotated in blue) along with the decrease in volume suggested exhaustion of downward momentum.

The S&P 500 is currently testing the downtrend channel oversold line, which could prone to a relief rally from the oversold condition. The channel’s oversold line bounce has occurred in the past on January 24, 2022, February 24, 2022, and May 20, 2022.

The two price targets based on the Point and Figure chart are 3900 followed by 3650. In May 2022, after the first price target of 3900 was reached, the S&P 500 halted the decline and consolidated for a month . The achievement of the second price target at 3650 provides a condition for the S&P 500 to try to rally when interpreting with the technical details as explained above.

Even if the S&P 500 begins to rally as depicted in the green path, it is crucial to watch the reaction of the price to key levels such as 3800 followed by the gap resistance zone near 3900 (marked as a red line) . Any failure along the way could signal the end of the bounce and the start of an impulsive downward movement.

Should the short-term bounce not materialize, a break below the recent low at 3640 and a commitment below the downtrend channel oversold line could trigger a capitulationwhich could lead to a stock market crash similar to the 2008 situation as detailed in the video at the bottom of this article.

Bullish Divergence Between the S&P 500 and the Market Breadth

A bullish divergence between the S&P 500 and the market breadth (percentage of stocks above the 50-day average) has been observed, as shown in the chart below.

A bullish divergence was seen towards the end of January 2022 until mid-March 2022 (marked in orange) where the market breadth formed a higher low while the S&P 500 formed a lower low. Subsequently, a strong rally started after the bullish divergence.

Similarly, between May 12 and 20, 2022, a bullish divergence formed followed by a relief rally testing the resistance area near 4200.

Now, a potential bullish divergence plays out from May to now. A significant rally in the S&P 500 would mark the third successful bullish divergence.

Comparison of stock market crashes 2022 vs 2008

When the silver lining fails along the way or even at first, the S&P 500 is likely to enter a stock market crash mode similar to the 2008 global financial crisis.

Watch the video below to discover the similarities of the 2008 stock market crash, from price structure to market rotation sequence.

The sign of weakness in the energy sector (XLE) started last week further bolstered this analogue of the stock market crash. Visit TradePrecise.com to get more free stock market information via email.

This article was originally published on FX Empire

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