After yet another bout of heavy selling on Friday, the bulls stepped in well before the day was over. Cheered by Fed assurances of being ready to support the economy, did they see the light at the end of the tunnel? Global markets are salivating at the prospects of a coordinated policy response, which begs the question. Is it really the end of the tunnel we’re at, or are these the lights of an ongoing train? In other words, how probable is still more selling ahead after stocks suffered their worst week since 2008?
Let’s put the sizable daily volatility into the context of the monthly chart (charts courtesy of
https://stockcharts.com).
A bad start to the year indeed, February erased quite a few previous months’ gains. Stocks keep trading inside the rising blue trend channel though, which means that it would be premature to talk about the end of the
bull market.
The bull got bruised though. Let’s check the damage on the weekly chart.
The key technical development is the break below the lower border of the rising black trend channel. The bulls didn’t show up sufficiently strongly on Friday to prevent this from happening, and
our assessment earlier posted that day, has been proven correct:
(…) unless the bulls really show up today, prices will close the week below the channel. And frankly, we don’t expect them to.
Our
Thursday’s observations also ring as true today as they did throughout the previous week:
(…) Yesterday’s slide turned the weekly indicators’ sell signals even more into negative territory. The bulls woefully failed to lift prices and this week’s sizable bearish gap stands unchallenged. Both the gap and the indicators continue to support the bears.
The preceding divergencies are still being resolved. Let’s quote our
Monday’s observations when we discussed the comparison between:
(…) the levels of both of these indicators with the price action. Stocks have been rising while both the RSI and CCI made lower highs. You can see it marked on the above chart with thin black lines. We have two divergences here – in other words, they didn’t confirm the price advance.
How does yesterday’s session look on the daily chart?
Another day, another bearish gap. The opening bell was met with more selling, and
we were ready, capturing almost 20 points of the downswing. Correctly assessing the high likelihood of a Friday upswing, we closed our short positions well before the first whiff of buying emerged.
On one hand, the bulls didn’t manage to close the opening gap. On the other hand, we’ve seen the highest daily
volume. However, the reversal in price wasn’t as high as it could have been expected in a true and lasting
reversal. And we seek to see both if a reversal is to be relied on.
The daily indicators have entered deeply
oversold territory, yet Stochastics has flashed its buy signal already. Can it be trusted though? Acting on signals in overbought and oversold territories can lead to whipsaws, which is why many traders prefer that the indicator clears that territory first. And looking at the overall picture the indicators are sending, it indeed appears premature to buy with confidence right now.
What was the catalyst of Friday’s rally? Expectations of a policy response announced. But when does it arrive? Will it be strong enough to satisfy the markets and keep stocks up? In the meantime, we can expect worsening situation on the ground, and the second coronavirus death in the US attests to that. For now however, it appears that stocks are positively discounting the steps to-be-announced that aim to soften the hit to economic activity.
And as we have seen in 2009, bad news can keep coming in long after stocks embark on an uptrend. That’s fine because markets are forward-looking.
Technically, prices are trading just in the middle of two orange zones. The upper one acts as a resistance (sending stocks lower in today’s overnight trading), while the lower one acts as a support. Unless we see one or the other broken either way, prices are range-bound as the market asesses and reassesses the evolving impact of the coronavirus story.
But that doesn’t mean there are no opportunities in such a sideways market. Short-term sideways until proven otherwise. The scenario we see as most likely, is an upswing attempt in the coming day(s) that would be followed by another wave of selling once the enthusiams about policy response expectations wears a bit off.
This fundamental hypothesis is supported by both the weekly and monthly charts. They’re leaning in the direction of some more pain to come.
Therefore,
this is what makes most sense to us from the risk reward-reward perspective – watch the bulls’ performance at the nearest resistance just above 3000. Should the bulls falter, we’ll consider opening short positions.
Summing up, the medium-term S&P 500 outlook has shifted to bearish, and more downside remains probable before this correction is over both in time in in price. Both the monthly and weekly charts attest to that. The daily charts’ divergencies between RSI, CCI and stock prices aren’t yet finished being resolved to the downside. While Friday’s upswing may appear encouraging to the bulls, one swallow doesn’t make summer. Despite today’s higher prices, another wave of selling still appears likely. We’ll keep a close eye on the bulls’ performance and what kind of shape the monetary policy catalyst of today’s higher prices takes, and act accordingly.
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Thank you.
Monica Kingsley
Stock Trading Strategist
Sunshine Profits - Effective Investments through Diligence and Care
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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.