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The S&P500 has once again tumbled towards the 4,400-level due to the ongoing Ukraine/Russia tensions and raft of hawkish FED speakers holding a more aggressive stance towards rate increases this week.
A massive head and shoulders pattern is currently capturing traders’ attention on the S&P500 as it is warning of more heavy losses ahead way below the psychological 4,000 support level.
In terms of the likelihood of this pattern playing out, it really depends on the situation in the Ukraine, and just how bad it could it this conflict spills over into a serious war between western powers.
As things stand, the downside potential is certainly there due to the weakening and technical backdrop, however, we also have to consider that any positive news could cause a major reversal.
Lower time frame analysis shows that a potential double-bottom pattern is forming, so a technical rebound could be on the cards. The price action is also more bullish than one would expect if market participants truly believed a major conflict was going to start.
Something else to consider is market sentiment. That ActivTrader sentiment platform shows that nearly 46 percent of traders are bullish towards this market. I believe this is a negative because negative sentiment is not high as you would expect.
Usually, we should look to fade sentiment extremes, which are currently not there. We probably need to see bearish sentiment to take hold before looking to buy the S&P 500.
S&P 500 Short-Term Technical Analysis
The four-hour time frame shows that the S&P500 could be forming a major double-bottom pattern, so we do need to bear in the mind the upside risks.
Downside risks are increased if the double-bottom pattern is negated, I would then expect a big drop towards the 3,800-support zone.
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S&P 500 Medium-Term Technical Analysis
Looking at the daily time chart, the central focus remains a massive head and shoulders pattern, which is looming large over the S&P500 and threatening to break at any time if the Ukraine conflict worsens.
A move under the 4,200 level is required to activate the massive bearish price patter which holds a 600-point downside target for the S&P500 index.
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