After the close on Monday I wrote about the bearish technical divergences that were present on the chart. The prior week RightView Trading was featured on the “Off the Charts” on Mad Money with Jim Cramer. In the segment we pointed out the bearish divergence between the Cap-Weighted S&P 500 Index, with a heavy concentration of technology stocks, and the Equal-Weighted S&P 500 Index.
Since then the S&P 500 has collapsed about 12% and pierced through several key technical levels on the daily chart. The trigger of course was the increasingly bad news about the coronavirus. But it was the fragility of the market that contributed to the magnitude of the decline. Here’s a brief review.
The first key level to go was the January low. It was penetrated quickly on Monday after a gap lower and the index closed right on the November high. The Tuesday session was particularly brutal. What should have been fairly robust horizontal support at the July/September high and the December low was taken out. Ultimately the S&P paused and found support at the uptrend line drawn off the June/October lows. On Wednesday it looked like there would be an intraday reversal but it failed. The S&P headed back down again and closed on the uptrend line where it had found support on Tuesady. This was something faintly poitive. A support line held for two consecutive days. But, on Thursday the S&P gapped lower again and in a day that some market pundits were saying had some sense of panic, the index dropped sharply. It finished at the October 2018 low. This is also the 50% retracment level of the December 2018 low and the 2020 high.
So where do we see downside support for the S&P 500 index over the short term? First up is the August low at 25340 and then the June low, which is also the 62% Fibonacci retracement level of the 2018 low to 2020 high. situated in the 24844 area. Below this zone there is very little in the way of obvious technical support. That’s another 4% of downside and we will take another look at the charts when we get there. Which could be later in today’s session.
The man who coined the phrase “New Normal,” Allianz chief economic advisor Mohamed El-Erian, was on CNBC’s “Squawk Box” this morning. He repeated his warning made earlier this month about the economic impact of the coronavirus. His specific instruction today: “I would continue to resist, as hard as it is, to simply buy the dip.”
Monday’s market decline was brutal. The Dow Jones Industrial Average was down over 1,000 points. The S&P 500 Index opened below its 50 day moving average and below a long term uptrend line on the daily chart.
The S&P did attempt a bit of a recovery in the Monday session around 3:00 o’clock in the afternoon. It rallied back up 1.3% from its session low to its opening downside gap level. This formed a bullish hammer candle on the daily chart but it was temporary. The index could not hold the intraday advance and quickly faded back down to session lows in the remaining hour of trading.
Interestingly, Monday’s low on the S&P 500 was exactly one tick above its January low. This 3214.64 support level will be the key technical level to focus on over the short term. It represents the support level of a horizontal trading channel we discussed in the “Off the Charts” segment of Mad Money with Jim Cramer earlier in the month. A bounce off this support level and a resumption of the primary uptrend is certainly a possibility (and the Tuesday futures are indicating some strength). But if the 3214 support level should fail, it would be a technically and psychologically destructive outcome. In the event of further downside we have highlighted several potential technical support levels on the daily chart.
On Monday the S&P 500 Index closed down about 5% off its recent all-time highs. If we measure Fibonacci retracements from the 2019 lows to the recent all time high the 38% retracement level is situated in the 3136 area. A test of that level would be a 7% decline off the highs. The 50% Fibonacci retracement level is in the 3058 area. It represents a nearly 10% retracement and textbook correction that would likely intersect with the 200 day moving average.
If primary channel support is broken these Fibonacci levels should supply secondary downside support. But in a volatile market like this current one confirmation of any technical level is key. Technical levels have to prove their worthiness and withstand retests. Under current market conditions it is a tall order.
Normally market movement is related to a combination of causal fundamentals followed by a reaction that is technically triggered. The 1000 point drop in the Dow on Monday was the reverse. The movement was related to a technically tentative market condition that was triggered by the fundamental concerns over the coronavirus.
The daily chart shows several clear bearish technical divergences. Chaikin Money Flow is a measure or buying and selling pressure. It has been moving lower even as the S&P 500 made a new high in January and then again this month. The same bearish technical divergence can be seen in the Relative Strength Index, a measure of price momentum, in relation to the rising index. There was further technical evidence.
Two weeks ago RightView Trading was once again featured on the “Off The Charts” segment of CNBC’s Mad Money with Jim Cramer. At the time the broad market continued to trend higher but the technology stocks were clear out-performers. We noted that the S&P 500 was a market capitalized index and was heavily weighted in the technology space. The implication was that it was distorting the action in the index.
We suggested that the Equal Weighted S&P Index ($SPXEW) might be a better way to gauge the technical condition of the broader market. This index, as the name implies, gives equal weighting to all the components of the S&P 500 Index.
It was pointed out in the “Off the Charts” segment that the S&P 500 Index and the Equal Weighted S&P Index had been moving in horizontal trading channels since the beginning of the year. The S&P had just broken above its channel resistance level but the Equal Weighted Index had not broken above its channel resistance level. This we thought might be an additional bearish divergence signal.
The S&P 500 Index continued to track higher over the next six trading days but the Equal Weighted Index continued to bump up against its channel resistance level. Our expectation was that the Equal Weighted S&P Index was more likely to move down to its channel support level than break above its channel resistance level. That is what happened but in full disclosure we did not expect it to take place in one day. As expected the S&P 500 has realigned itself with the Equal Weighted Index. Now the integrity of the channel support on both charts will likely determine the intermediate term direction of the broad market.
So there were technical signs for some time that a decline was imminent. It hit hard in Monday’s session but those channel support levels while looking shaky remain intact. That’s a positive but they have to hold, the intermediate term health of the market is dependent on it.
(This is a re-cap of the segment of the show that was published on TheStreet.com that night.)
In June last year, the SPDR Gold Shares ETF (GLD) broke above long term resistance situated in the $130 level. This level was also rim line resistance of a shorter term cup and handle pattern on the weekly chart.
The cup and handle pattern projected an upside target price measured by taking the depth of the cup portion of the pattern and adding it to the rim line. This calculation identified the $145 level as the price objective.
The GLD tested the $145 level in August and September last year. After failing to take out that level the ETF pulled back in a declining channel pattern. The combination of the upside price action in the last half of 2019 and the subsequent channel consolidation formed a bullish flag pattern.
The flag pattern also projects a pattern price objective. The process is to simply take the height of the flagpole and add it to the top of the flag. In this case, it targets the $170 area.
In December 2019 the GLD broke out of the flag consolidation channel. Price continued to move higher in the early weeks of this year then began consolidating again in the $147/$148 area. In today’s session the GLD is up over 2%, following up on its gain on Wednesday. It is well over the $147 now and may be on its way to fulfilling its $170 price objective.
Technical patterns don’t always play out as we all know, and by my anecdotal take is that projecting price objectives has even less success. But the purpose of both exercises is to provide context for a trade.
Again, self-explanatory and presented without commentary:
Be sure and check out earnings dates.
These charts are self-explanatory and presented without commentary:
…to be continued after the open.
A very rare candle pattern has formed on the daily Amazon (AMZN) chart. It is called a bearish tri-star pattern and is considered a reversal sign.
The bearish tri-star consists of three narrow opening and closing range doji star candles. The second in the series closes higher than the first and the third in the series closes lower than the second. It reflects uncertainty and consequently a transition in trader sentiment from bullishness to bearishness. It should be pointed out, however, that this pattern does not have a high degree of reliability. It is still a pattern that should be monitored carefully, particularly when a stock is nearing all-time highs.
It always important to put price action in perspective. Take a look at the weekly Amazon chart. Two weeks ago shares broke through long term triangle resistance on this time frame. There has been follow-up price action this week with both these moves coming on strong volume.
This suggests that even if Amazon shares do pullback it may only constitute a retest of triangle resistance-turned-support in the 2050 area.
Zoom Video Communications (ZM) shares jumped higher in the two months following the company’s IPO in April 2019. The stock price then began making a series of lower highs and lower lows trading back down to its IPO opening price of $60 in October of that same year.
A bounce off the $60 level failed to gain traction and Zoom shares returned back down to $60 support. But a second December bounce turned into a trend and shares began making a series of higher highs and higher lows. It also established a $60 double bottom on the chart.
The Zoom momentum continued taking out several important levels of resistance. Then this month shares spiked higher. The nearly vertical move has been tempered by some recent sideways consolidation and this price action has formed a bullish flag on the daily chart.
The flag pattern projects a target price measured by taking the height of the flagpole and adding it to the top of the flag. It suggests that Zoom shares are headed back up to their 2019 high made shortly after their IPO.
I’ve been using this chart to track the Volatility index for a long time. In the past the area between 11 and 12 has acted as a reliable floor of support. Short lived spikes and historically low readings suggest that there is little fear in the “Fear Index.” But that could be changing.
It is too early to be sure but we may be establishing a new and higher zone of support.The area situated between the 14 and 15 levels was tested several times last week. On Tuesday it was penetrated early in the session and recovered forming a strong looking hammer candle. Hammer candles are considered bullish and are often reversal indicators.
Volatility spikes have been shorted lived in the past and generally volatility has been historically low. The most recent spike up was brief but it penetrated the long term downtrend line going back to August. Now the index looks to be forming a higher basing platform outside of that important downtrend line.
This could be a first sign that there may be a little fear in the “Fear Index.”