The trio in question | Wyckoff power chart

The markup phase of a bull market is an honor to watch and participate in. But there are ebbs and flows. The strength of major stock indices continued into 2024. We often discuss the end-of-quarter effect on stock index trends, and the upward trend continued through the end of the first quarter with waning momentum. As the second quarter begins, let’s turn our attention to some classic and powerful Wyckoff chart studies to determine where the index stands today and its possible future direction.

S&P 500 Index using Wyckoff markup. 2021-2024

This S&P 500 daily chart will be familiar to regular readers. This is a Wyckoffian record of market structure dating back to the peak of the bull market in 2021. This is a live journal of Wyckoff analysis with distribution structure, markdown, cumulative phase 2022-23 and now markup. Markup, with its development starting in October ’23, has finally exceeded Accumulation’s scope constraints. We’ve been making the case for Accumulation unfolding here and in the Wyckoff Mayoral Debate (every Wednesday with Roman Bogomazov) during Accumulation.

Recently, the S&P 500 has risen beyond its well-defined markup channel into Throwover and OverBought states. This OverBought / ThrowOver arrived as the first quarter came to a close. So I suggest some ‘window dressing’ nonsense based on institutional type. Often, a strong trend (both upward and downward) in an index can continue for several weeks into a new quarter. We will be watching for changes in the nature of the index’s behavior in the second quarter. An example of this is the S&P 500 reversing back into an uptrend channel. A sudden and sharp return to the channel is indicated as an automatic reaction (AR) and represents an important confirmation of the exhaustion of the uptrend. Until such an event occurs, the upward trend should be respected.

We expect the uptick in the markup phase to be broad and strong, and that is the case here as well. Remember that accumulation is an area of ​​increasing pessimism where the public and institutions are increasingly cautious. This caution manifests itself in portfolio defensiveness (higher levels of cash, lower beta stocks, and more bond-type assets). Meanwhile, the ‘complex manager’ type is absorbing stocks with good growth potential and good value characteristics for the next bull market. This puts the stock in very strong hands. This supply-demand imbalance can cause stock indices to rise higher after the accumulation preparation phase. According to Accumulation’s conclusion, widespread pessimism was observed in the extreme pessimism readings of various sentiment gauges (as profiled at the time on Power Charting and Weapons of Mass Destruction (WMD)).

Point and Figure Price Target

S&P 500 Points and Figures Study. January 2023

This PnF legacy chart was first profiled in January 2023. This estimates the downside potential of a bear market met through a selling climax and secondary test. Climax began Accumulation (detailed in the vertical chart above) which continued throughout the second half of 2022. The upside from Accumulation, which was nearly completed in January ’23, was estimated in three parts. The first two parts are now satisfied. When this prediction was made and published the Count Line was 3,775 and $SPX was 4,000. The pessimism at the time was such that it caused a lot of distrust in the study, which was a very good sign that higher prices were to come as the indices began to climb the ‘wall of worry’.

Here is the PnF update at the markup stage: Phase 2 price targets are now being achieved. The new price high, which surpassed the 2021 bull market peak, has noticeably inflated bullish sentiment. Analysts are now rushing to predict $SPX above 6,000 or even 7,000. This surge in optimism is a warning sign that caution is needed.

S&P 500 points and numbers study, 50 point scale. April 2024

The current interpretation of 2022-23 Accumulation shows a strong markup following Accumulation (50-point scaling slightly changes the price target). Once the downward trend channel was broken and tested from above, the uptick was dramatic. The index price has now pushed out the bull market for 2021 with a possible backup to old resistance.

The Threefold Problem (Summary)

1) The S&P 500 is currently above the rising trend channel. This overbought condition can lead to a correction, confirmed by a return to the channel. The old resistance of the 2021 bull top will be the price level where support is expected to develop.

2) The point-and-figure price target created for early 2023 is currently being achieved. Look for classic signs of behavioral disruption, such as knee-jerk reactions and range-bound sideways trading. This creates PnF water potential for ReAccumulation or Distribution. Higher price targets remain in place and there is good seasonality for the second half of this election year. We will be watching the tape for further instructions.

3) Sentiment changed from bearish to bullish. High readings for NAAIM, AAII, CNN Fear & Greed and other important indicators are frothy. This is normal and typical in a bull market as the trend ebbs and flows. A correction in an upward trend brings caution and even pessimism toward hoarding cash for higher prices in the future.

Dynamic markup is a very interesting, important, and unmissable feature. Modifications along the way are inevitable. They often represent a change in leadership as the economy matures and its personality changes, and that appears to be the case here (the subject of a future WPC blog post).

All are the best,

bruce

@rdwyckoff

disclaimer: This blog is for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.

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