Despite the recent breakout in the S&P 500 (SPX), UBS technical analysts are urging caution as they see potential for a bull trap developing in the US stock market indices.
More precisely, analysts see high potential that the S&P 500 is on its way to set “an important tactical top as setup for a negative surprise into Q1.”
“With a number of divergences in our indicator work, toppish trend momentum (mature trend), our sentiment frame in outright contrarian territory, the too low volatility, and taking into account extreme oversold yields, we still think that the current breakouts is the setup for a classic bull trap instead of believing in the start of a larger breakout campaign,” analysts wrote in a note.
Given the above-mentioned technical factors, analysts see potential for “a meaningful reversal,” which could potentially result in the index falling to 4280 in Q1. For this to happen, the SPX would need to break below the key resistance of 4607.
“A re-break below 4607 would be an initial short signal.”
In addition to these technical developments, analysts also see risk assets trading under pressure early next year thanks to the expected bounce in US yields.
“In early Q1 we expect a first meaningful reversal as the setup for a negative surprise in US global equities with an initial target projection 4100 into late Q1/early Q2,” they concluded.