Below is a larger version of the daily chart posted in yesterday’s TL Notes. Since SPX closed above the EMA 20 it has opened up the potential of something I have suspected, which is for a bounce that really screws with the shorts (just ask my weekend hedge positions) and FOMOs the bulls enough to get many of them back in the market, thinking the worst is over.
As you know recent NFTRH editions have been chock full of long side stock ideas, so I have been anything but terrified by the pervasive COVID-19 fear running market sentiment. On the contrary, sentiment has been epic over-bearish and doom has been everywhere. My concern is and has been what they’ve done to the economy and what will be the longer-term fallout from the mass global ‘stay at home’ regime. I don’t believe we just restart and live happily ever after.
But the fact is that last week SPX held the 2450 support we laid out for it and it zoomed upward yesterday. I have added some Fib retrace levels from the top (hard to believe the thing was near 3400 in mid-February, isn’t it?) and a theoretical A-B-C correction scenario. This would both provide some additional upside to point ‘B’ and also keep open our downside target of 2030-2100, to perhaps come after the FOMO is done, Corona-fears subside some more and the market is left with a bunch of relieved bulls but a significantly impaired economy to deal with. Point ‘C’ could then take the market down to finish a bull market correction around 2030.
Assuming today’s pre-market holds true to the open we can see that SPX would ding a resistance area. Considering that the 50% Fib above is at 2792 and right in the midst of that resistance zone, traders should have a level of caution if the A-B-C scenario is valid. We do have a potentially higher point ‘B’ at the 62% Fib and the moving averages, but up there risk would be higher. Aside from that, there is a classic ‘Death Cross’ in those moving averages, which of course is met with a vigorous bounce (per usual).
For reference, here is the cold and uncaring weekly chart from the Sentiment segment. The bounce is about to enter the critical zone and while other aspects of sentiment have registered very over-bearish (a positive on the longer-term view) the VIX has been driven down, increasing market risk from this view. As SPX bangs resistance while VIX bangs support it would be a point to have caution.
Meanwhile, the monthly chart below advises that the best support for the flash bear market is 2030 (62% Fib retrace of the entire bull market). I provide this road map as what could be, not what will be. It is logical to me. But we’ll move forward and evaluate what reality does to my logic.
The alternatives are that a flash bear market is already in the books and it’s back to bull heaven or that it will be a secular bear market. Neither of those are favored. The favored view is that the stock market is rallying hard in the short-term but ultimately taking a painful correction (cyclical bear) to a well defined support area (2030) prior to a resumption of the secular bull.