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Last week marked the second worst selloff in S&P 500 since January 2022 as it dropped 5% in just two days. The selloff accelerated to the downside after a break below the key support as illustrated in the failure scenario in the video at the bottom of this post.
Using Wyckoff Method To Identify The Demand Zone
Despite the bearish characteristics in S&P 500 last week, it is essential to understand how the smart money accumulates or distributes the shares off the bottom in May 2022 in order to anticipate if a stock market crash similar to the global financial crisis in 2008 as explained in the video previously will happen soon.
Presence of demand can be identified near the swing low around 3900 based on the Wyckoff method by interpreting the leading indicator – volume correctly. The demand bars have been highlighted (in orange) as shown in the chart below.
The highlighted bars in May 2022 were accompanied by high volume yet did not yield significant progress to the downside. According to the Wyckoff’s law of efforts vs results, increasing of efforts (volume) to push the price down yet the results were minimal downward progress, suggested presence of the demand.
A demand zone based on these 4 bars has been annotated in green rectangle between 3800-3960. The subsequent two up waves (as annotated in blue arrow) stalled at the axis zone where the previous support-turned-resistance between 4100-4200. This suggested a lack of aggressive demand to push the price through the resistance as reflected by the lower volumes (annotated in blue declining arrow).
There was potential supply absorption within the trading range 4070-4200. Yet, there was only value buying near the support zone (4070-4100) instead of aggressive demand to initiate the breakout to the upside. Presence of selling off the resistance near 4160 was observed as shown in the hourly chart of S&P 500 below.
Selling bars off the resistance were highlighted in red as per the market update on 8 June 2022. Although this was not a confirmation signal to turn bearish, supply absorption in the trading range could not be confirmed either hence a failure case must always be kept in mind.
The failure of the supply absorption scenario as explained in the video at the bottom of the post played out where S&P 500 broke below the key support level at 4050, followed by a sharp selloff testing into the demand zone. The selling bars on 9-10 June 2022 came with decreasing volume despite the huge bearish spread.
The current bearish scenario is mainly due to lacking of aggressive demand rather than heavy supply selling into strength. Therefore, more testing of the demand zone can be expected and the stock market crash is not expected to happen soon.
S&P 500 Price Forecast
Since the rally off the low on 20 May 2022 was a change of character rally, a trading range between 3800-4200 could be anticipated. Refer to the chart below:
An extreme pessimistic sentiment could further drag S&P 500 down to test the demand zone until value buying shows up to stop the current down move. A Wyckoff spring to test the previous swing lows at 3800 or 3860 (annotated in blue) can be anticipated.
For the bullish scenario (in blue path) to materialize, the support at 3800 is to hold followed by a decent rally to test the resistance near 4200 to signal there is enough demand to drive the price up. Should S&P 500 show poor rally with increasing of volume, beware of the bearish scenario (annotated in red path), which could trigger the stock market capitulation similar to the 2008 scenario.
Failure of The Supply Absorption for S&P 500
As mentioned earlier, watch the video below to find out how to spot the supply absorption where the smart money accumulates shares and at what point will the bullish scenario get violated.
Every stock market bottom starts from extreme bearish sentiment and pessimism. Although it is too early to call for the market bottom just based on the sentiment, there are still plenty of profitable trading opportunities around when one can interpret the market messages correctly. Visit TradePrecise.com to get more stock market insights in email for free.
This article was originally posted on FX Empire
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