Many traders and investors were speculating last week about a potential market bottom, or at least a meaningful rally that may be just around the corner, as the benchmark S&P 500 index climbed from an oversold condition below 3,900 points to nearly 4,100 points in just 4 days, Yahoo writes.

But traders expected the rally, if any, to be short-lived, which was reinforced by a bearish reversal from the 4,100-point resistance level on May 18, 2022 for the S&P 500 Index.

In order to talk about a bottom in the stock market, capitulation by both institutional investors and retail traders is necessary. Before capitulation in the market occurs, the leadership of any one sector, industry group and stock will disappear along with the market rotation.

The current pricing structure in the equity market is very similar to the scenario seen during the 2008 global financial crisis, as can be seen in the XLP ETF from the consumer staples sector before the market capitulation in 2008.

From January through September 2008, XLP outperformed the S&P 500, when XLP attempted to break to a new high on September 19, 2008, the S&P 500 formed a lower high and a lower low, testing a support level and simultaneously a resistance level of 1260 points.

A few days prior to the failure of the breakout, XLP saw increased selling, which served as a red flag for a breakout attempt. After breaking below immediate support on rising volume, XLP struggled to move upward, which ultimately led to its capitulation along with the entire S&P 500 Index.

The magnitude of the decline after forming a low was 25% for the S&P 500 with a steep and wide price spread and a sharp downward decline. The characteristics of both price and volume of the decline indicated overall market capitulation. Subsequently, a significant rally from an oversold condition marked the culmination of the selloff and began the process of forming a bottom that lasted for 5 months.

XLP has experienced a strong sell-off this year, suggesting rotation out of the consumer staples sector, which is traditionally a defensive sector.

Since the end of April 2022, the sell-off in XLP intensified and the subindex broke below the 78 point support level.

On May 18, 2022, XLP broke below the 76-point support level from the COVID-19 era market low with increasing volume indicating an urgent sell-off. This sequence of events is very similar to what happened in 2008, and therefore it is conceivable that a potential capitulation of the U.S. stock market could soon begin, just as it did in 2008.

Last Thursday and Friday there was demand in the sector and therefore an attempt to rebuild the rally is expected. If the rally does not exceed 4100 points, a capitulation of the entire stock market is likely to begin soon.
*** Translated with www.DeepL.com/Translator (free version) ***