Deeply pessimistic sentiment conditions, evidence of short-term selling exhaustion, and the S&P 500’s successful test of 1810 argue for a countertrend rally, according to Ari Wald, Technical Analyst at Oppenheimer.
Wald points out that many internal breadth measures, such as the NYSE Advance-Decline line, have broken down significantly. With only 15% of NYSE stocks above their 200-day moving average, Wald sees “considerable fuel for a countertrend rally.” (see Chart 1). Momentum indicators, such as the RSI, have diverged bullishly versus the S&P 500 in the last few weeks, indicative of “less bad” selling intensity (see Chart 2), also argue for the same relief rally.
Moreover, Wald thinks a countertrend rally is increasingly likely as we near the March-April period. He notes that since 1950 these have been two of the four best performing months of the year when the S&P is trading below its 200-day moving average.
However, Wald is not yet convinced that a full-strength bull market is ready to resume – for that, he would like to see evidence of trend stabilization. In the mean time, Wald thinks the S&P 500 will remain capped below the 2000 level.