The Dow Jones Industrial For the most part rose 2,113 points on Monday, the biggest one-day gain since March 1933, prompting a boatload of armchair analysts to swear that the market had “bottomed out.” Gains in the past two sessions have added to this impression, underpinned by V-shaped summons that saved the day throughout the 10-year bull market. However, bottom callers forget that the market loathes uncertainty, and we’ve entered the most uncertain period in U.S. history since World War II.
Stocks and indices have bounced at recondite support levels after hitting extreme oversold technical readings. An “oversold bounce” can be quite vigorous, provoked by extensive short covering by weak-handed players who chased the downside. These vertical impulses fail the vast mass of time, usually at easily observed resistance levels. In turn, that tells informed market players to care for price action closely around the 2,700 level on the S&P 500, or $270 on the SPDR S&P 500 ETF Trust (SPY).
Downside since February has upped through a potential Elliott five-wave decline that completed a third wave on March 23, ahead of the in touch fourth wave bounce. The sell-off carved a continuation gap right at the dead center, which typically projects the halfway sense for the first major downswing of a developing bear market. Pullbacks to continuation gaps during fourth fourth billow countertrends set off major sell signals because the barrier is tough to breach on a first try.
A Fibonacci grid stretched across the one-hour blueprint, with the 50% level at the continuation gap, places the final terminus for this Elliott wave pattern near $190. Setting aside how, this doesn’t predict a final “bottom” because we don’t know if there will be larger-scale down waves in the time to come. But for now, it offers a useful projection for immediate downside and how that might affect your portfolio.
The sell-off ruined an 11-year trendline and the 50-month exponential moving average (EMA) when it cut through $260, marking the first time the S&P 500 is vocation under the moving average since 2011. The current bounce is testing new resistance from the downside, but since this is a monthly crack-up, there could be multiple whipsaws before resistance is confirmed or support is remounted. This uncertainty highlights $270 right away again as a line in the sand between an oversold bounce and an impulsive rally that signals a longer-term low.
The monthly stochastic oscillator set out oned a long-term sell cycle in February 2020, predicting at least six to nine months of relative weakness. The indicator is now extending through the panel’s midpoint, telling us that sellers remain in control of the tape despite this week’s vault. The signal line is also trying to play catch-up right now, adding downside pressure that is likely to re-exert its glaring influence in coming sessions.
Finally, consider SPY cash flows in the past few months. The on-balance volume (OBV) accumulation-distribution gauge topped out in March 2018, at the same time that trade war anxiety hit the ticker tape. OBV returned to resistance in February 2020 and penniless out, but it failed the breakout a few sessions later when the virus outbreak expanded in the United States. Distribution since that over and over again has been intense, with panicked shareholders escaping through the fire exits.
This week’s bounce started unprejudiced above the December 2018 low, which signals a bullish divergence because price action has broken that unvarying, but that’s where the good news ends. It took nine months of selling pressure to swing from outrageous to low in 2018, but we’ve accomplished the same task in just five weeks this time around. That signals a far more virulent event than the 2018 occurrence, with the likelihood that OBV will soon hit new lows.
The Bottom Line
Tush callers are coming out of their caves, but a close look at S&P 500 technicals predicts lower lows in coming weeks.
Disclosure: The novelist held no positions in the aforementioned securities or their derivatives at the time of publication.