A bullish reversal pattern for the S&P 500

Key points:

• The S&P 500 reversed from a 21-day low (close) to a 21-day high (close)
• The low-to-high price reversal occurred in fewer than ten sessions 
• After similar price reversals, the S&P 500 tended to see further upside in the near term

A price reversal pattern with bullish implications for the S&P 500

The stock market continues to rally from an oversold condition. While market breadth has been constructive in a handful of sessions, we have yet to see an urgency on the part of buyers that generally triggers breadth thrust buy signals. 

Sometimes, breadth-based indicators fail to give us the all-clear signal. So, we monitor price-based patterns for bullish reversals.

The world's most-watched benchmark reversed from a 21-day low (close) to a 21-day high (close) in fewer than ten sessions, triggering a bullish price-based pattern. 

Similar reversal patterns preceded positive returns

A swift reversal from a 21-day low (close) to a 21-day high (close) typically leads to more upside momentum, especially in the near term. After the initial bounce in the first month, the S&P 500 tends to consolidate the gains before heading higher. 

The price reversal pattern typically occurs during bull markets. So, let's add some context to the signal. I will now identify a reversal from a 252-day low (close) to a 21-day high (close) in fewer than ten sessions, which should capture alerts in significant drawdown phases like now.

While returns and win rates still look impressive, we see a slight deterioration in the z-scores across most time frames. A signal occurred after significant bottoms in 1974, 1982, 2002, and 2009. However, the pattern was also susceptible to a whipsaw alert in some of those same drawdown phases.

What the research tells us...

Stock market indexes are rallying from an oversold condition. The counter-trend bounce has failed to trigger breadth-based thrust signals similar to the June to August rebound. However, a price-based reversal pattern for the S&P 500 issued a new alert on Monday. After similar reversals, the S&P 500 tended to see further upside in the near term, regardless of the environment.