The market (NYSEARCA:SPY) just hit a speed bump by trying to rocket to the old high after a Covid-19 market crash. Everyone was amazed at the quick bounce-back in the market despite the enormous unemployment and the continuing bear market in the economy. The market was optimistically looking for a rare “V” bottom and a short-term, successful reopening of the economy.
The market just received a shock about any quick opening of the economy, because of the soaring increases in the virus cases. The first wave of the virus continues to grow, and there is no sign of a pullback before a second wave, except perhaps in New York and Europe. The US has failed to knock this virus down. SPY is retesting the bull/bear line in the sand. Will it turn bearish and retest the bottom? Let’s find out.
First, we want to look at the daily chart because it is a leading indicator of the weekly and monthly charts that are more useful to buy-and-hold, fundamental investors. The daily chart is for traders, while the weekly and monthly charts are for investors, because they eliminate the noise and unreliable signals of the day-to-day trading. Investors are interested in trends.
As you can see from the daily chart below, there is a bearish, top signal, called an “island reversal.” It correctly warned us about this pullback. You can see price testing the 200-day moving average, the so-called “line in the sand” for a bull or bear market. The bounce up exhausted the buyers in order to get above the 200-day. Now it will use the bad news to retest the 200-day, and we will find out whether this bullish move above the 200-day turns bearish, followed by a retest of the bottom. This would form the classical “double bottom” rather than the rare “V” bottom. A vaccine or a permanent knockdown of the virus would create a “V” bottom. The market is pulling back because we don’t have a successful knockdown of the virus. That leaves the door open to a longer recession than the market was anticipating. Here is the daily chart with our annotated comments. (These signals are explained in my book “Successful Stock Signals).
Next we want to look for the longer-term trends on the weekly chart. This chart has more reliable signals than the daily chart. Long-term investors hate signals that reverse, as they frequently do on the daily chart. The bullish signals on the daily chart just reversed to bearish. Market darlings like Nike (NYSE:NKE), Lululemon (NASDAQ:LULU) and Facebook (NASDAQ:FB) are taking hits. What does that do to the market? Let’s see what the weekly chart is saying about long-term trends that are so important to the fundamental investor. Is it a time to take profits, raise some cash and wait for a retest of the bottom to buy on weakness again?
As you can see on the weekly chart, the price trend is enormously bullish. Price moved above the normal 50% retracement bounce, trying for a “V” bottom, 100% retracement. It failed. The top signal and the bottom signal on the chart tell us why it failed. No green money flow signal on the top of the chart. No green line cross above red line in the signal at the bottom of the chart.
Now we see the overbought Demand signal turning down, “Full STO”, and we see the bars dropping from a buy cycle peak, “MACD” signal. Thus the signals have turned down and against the positive price trend. However, it has not changed that trend just yet. These signals tell us that a selling cycle has started. Price is going down to test support levels. You can see those price levels highlighted on the chart as previous high prices, namely $296, $288 and $283. If these support levels hold, no problem. It’s a big problem if they fail. My guess is that they will fail because of the increase in virus cases, July earnings and the election. Good news on the vaccine front will slow the drop in price. A vaccine will reverse the drop.
Finally, we want to look at the monthly chart. It sacrifices timeliness to give us more reliable, long-term signals. Here is the monthly chart:
As you might expect, the monthly chart is still bullish. The MACD and Full STO are improving. However, money flow at the top of the chart continues to drop. The candlestick for the month of June is bearish. That is a short-term signal, telling us price is going down to test support, but we already know that from the daily and weekly charts. How far down is price going? From this chart, I would target $283.18.
The Fed and Congress are supporting this market, and I have no intention of fighting this positive fiscal and monetary stimulus. The duel right now is between the daily good news on a vaccine and the daily bad news on reopening the economy. Thus, I see a test ~$280 and a bounce back to retest ~$300. No vaccine, a stalled reopening, July earnings and the election are factors that I think could take SPY down to retest the bottom for the classic, double bottom. However, I don’t see those negative signals in the charts just yet. As of now, SPY is just going down to test support at $296-300. This is still a bear market trying to become a bull again.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in SPY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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