The rally has gone like this…
- Intense capitulation to the bearish price activity on Christmas Eve.
- Reversal after shakeout, with sentiment epic over bearish and screaming contrary bullish.
- Original target of SPX 2600-2650 taken out with little trouble (now initial support).
- Sentiment is doing as it should on a “relief” rally… it is relieved! And it is over bullish toward extremes.
- As sentiment becomes extreme so too does the index’s proximity to extreme technical targets, the next of which is 2815.
So now let’s pick up where the market left off on Friday with a review of the weekly chart. SPX approaches the Q4 bounce highs at 2815. That is not the most formidable resistance I have ever seen. If it breaks through there SPX would be on the Top-Test Express, as some sectors already are.
I have drawn in a hypothetical channel (blue) and hypothetical is all it can be right now as it has only one upside touch point. With the market running on animal spirits (with a side of China Trade relief/dovish Fed) it is going to stop when it stops. A relief valve is open and no chart resistance on its own is going to stop it.
Now let’s look back at 2015-2016 for a somewhat less dramatic version of what could be in play here. The first hard drop in the summer of 2015 was met with a vigorous rally to fix sentiment. That rally tested the previous top and failed to lower lows. Then another big time rally began as NIRP and Brexit (substitute Trade Tariffs and the previously hawkish Fed as the bear sentiment drivers on the current situation) dominated the headlines.
Today’s big time rally began amid terrible headlines and continues as those headlines get nicer (forget about the government shutdown/wall dispute; that is just media and political fodder in my opinion).
Now, there are two ways to look at this chart.
- 2018-2019 SPX is mimicking 2015-2016 SPX, having already made the lower low (to a year ago) on a longer and much more volatile time frame) or…
- SPX is preparing to top out and possibly decline to a lower low to the December low that could potentially reach the original target zone (about which I am open to being a big buying opportunity).
Another factor is the state of the moving averages. Although not shown here, in 2001 and 2008 the EMAs 20 & 50 provided excellent bear market signals when they crossed down (as they currently are). But 2011 and 2016 saw the moving average crosses negated in favor of the bull case. It is likely they are going to cross back up again shortly as they did temporarily in 2015 before the next down leg and as they did much more sustainably in 2003, 2009, 2011 and 2016.
All of the above is a fancy way of saying that the stock market is going to either test its top and go bullish or test its top and fail (one could argue that it is already on a top-test, given length of the journey from the December low). The odds are stacked with the failure scenario simply because sentiment is all on the bull side of the boat now. Why again is the rally from Christmas Eve so intense? Because sentiment in the other direction was so intense back then.
But sentiment and TA are two different things. The weekly chart gives us some options as to what may be ahead both on the near-term and out on the ‘months out’ horizon. Let me know if you have any questions. This update is obviously not providing clear answers (predictions), but it is opening up scenarios and probabilities for ongoing perspective. The theoretical (blue) channel line gives another point to watch for, the moving average cross is a warning at least and sentiment is not favorable for a sound bullish stance right now.
More to come as this thing evolves.