From Wednesday’s update on the SPX bounce (emphasis added)…
To keep symmetry with the ‘alt’ shoulder scenario this morning’s projected opening gap to 2820 should be about all there is to the bounce. Ah, but we have seen this movie before and it does not always make the sense we think we see in advance, so let’s also allow for a gap fill and upside test to the SMA 50.
The favored plan continues to be for a ‘bounce only’ and failure. That would be the case as long as SPX does not take out the SMA 50 and move higher than the right shoulder. But again, this morning’s projected open could satisfy a bounce objective as well.
SPX closed Thursday at 2843, above the 200 day moving average (2775) and lateral support at 2815. All that remains allowable to keep the bearish technical case intact is a gap fill, the SMA 50 (2869) and the right shoulder. A higher high to that shoulder could be a bull trap signal but really, let’s not go laying hypotheticals on top of hypotheticals. Going by rules, the SPX should top out soon or the bears will give back the ball.
This bounce could be all about getting that gap out of there… or this bounce could be all about having created a bear trap with a beautiful bearish looking short-term would-be pattern that is now losing its symmetry to its left side. Again, we’ve seen this movie before (picture a theater full of bears averting their eyes at the grossest scenes).
The correction and bounce came against the trade tariffs hysteria and especially increasing odds of a coming rate cut regime by the US Fed. The bond market is demanding that of the Fed, after all. The trade stuff is noise, not because it will not impair some, but because it is difficult to accurately define what will be impaired and what will be aided until it starts to shake out. It’s not like this will be all negative. It won’t, especially when considering that Mexican and Chinese currencies are adjusting vs. USD to compensate, at least partially.
Does the above sound like a chart guy looking for reasons to be bullish? Well, if instructed by the market that is exactly what it will be. So I don’t out think myself I have parameters and indicators. The next three (short-term) are a gap fill, a takeout of the SMA 50 and then a higher high to the right shoulder on the chart above. Short of that, a new daily chart downtrend is in force.
What bothers me if I am a bear? Junk bonds (HYG) have taken out their SMA 50 (in total return terms; HYG minus dividends is still below its SMA 50). Most of the Market Internals stuff we monitor each week in NFTRH remains red (bearish) but some of it is bouncing like the market. The SPX Advance/Decline line is however, on a significant positive divergence to SPX.
Sentiment became very bearish on the recent pullback (and let’s face it, in the grand scheme of things that is all it has been since the April high) and the AAII got really spooked as the Bulls/Bears came to a historically extreme over bearish level of .53 on this moderate market decline. NAAIM (investment managers) took hard pullback with the correction as well. Dumb money has reduced its bullishness from 80% to 54%, and so on. The question now is whether the bounce can repair over bearish sentiment before it negates its bounce status and morphs to bull resumption status.
It’s “sell in May” season and everybody knows it. That conviction has been aided by the headlines, which painted doom and gloom. But a new headline is in the mix with the growing din about Fed rate cuts. The media, unsurprisingly, are starting to rotate that happy story. Anyway, what everybody knows often does not come about. The new Fed rate cut headlines are appearing to spur relief. Fed rate cut cycles come with economic stress and yet as noted in NFTRH 554 the Citi Economic Surprise Index bounced while the SPX corrected. Rate cut cycles come with projected economic deceleration. But who is accurately quantifying the trade war? Or is it something else out on the near horizon; something like a normal ramp down of the current business cycle?
The bears have the ball on the short to intermediate-term and the technical parameters to that are noted above. So the bear case is in force but the bull case has held the support area (and the SMA 200) as expected. Now having taken out 2815 and heading for the gap and SMA 50 it is pushing the bounce limits. If it fails, we’re still on the bear plan. If the market fools the “sell in May” crowd and keeps rallying into the relative quiet of summer, at least we’ll have seen this movie before and know how it goes. See you on Sunday with NFTRH 555.