On Wednesday, the indices declined by roughly 2% across the board, a far cry from the 5-7% swings they were being subjected to just a few short weeks ago. The most recent rally from the bottom of the right shoulder (chart 1) reached our target zone on Tuesday, setting the stage for today's risk-off session. NYSE down volume accounted for 89% of total volume, though a similar metric encompassing all U.S. stocks stood at 80%.
Basically, I'm contemplating two main scenarios:
Scenario #1 is one in which prices would aim to retest the March lows to form a base (we already have one, maybe not wide enough). Retesting the lows doesn't automatically imply going all the way back down to ~2200 on the S&P 500. We've discussed this already more than once: the retest could unfold as a triangle (chart 2) whose purpose is to bring the bear market to an end at a higher low. This would be almost identical to the May-October 2019 triangle that brought the multi-month consolidation to an end at a higher low on October 3rd. In effect, the 2019 triangle was a ‘price-and-time’ correction: it was relatively shallow (price) and protracted (time). Moreover, its orthodox low was established in early June, only to be retested without being breached later on during the summer. It was a 'wait-and-see' pattern during which a new all-time-high was actually registered in July (head fake). This goes to tell you that corrective patterns often assume one of several convoluted forms, including ones where price makes an unsustainable new high. In retrospect, the market in summer 2019 was eager to go higher, but it also wanted a definitive resolution to the trade deal fiasco (trade deal fatigue). No trade deal meant no new highs. Period. That episode last summer taught me a very valuable lesson: as a technical analyst, I can’t arbitrarily interpret a chart without a plausible narrative that jibes with the facts. Why am I reminiscing about 2019, you might ask? Because something very similar might be happening here too: the market wants to go higher, but not until the Coronavirus is under control to allow the economy to get back on good footing. Stocks aren’t just going to soar to their old highs just because of the monetary and fiscal bazookas. The last time I checked, earnings and forward guidance don’t play second fiddle to money printing. Moreover, thousands of businesses and millions of jobless Americans are on life support. THIS IS THE ECONOMY WE CURRENTLY HAVE. So, let’s forget about the V-shaped BS for now and let's just ‘wait in see’ as we did in 2019. The other thing I must remind you of is that this bear market was sharp and sudden. It was tantamount to a ball being dropped from the top floor; the strong bounce was inevitable, given everything was pretty much priced in. And momentum can be a beast, especially when algos are involved. One more important point to remember: this bear market is the supercycle's fourth wave. It goes hand in hand with the supercycle's second wave which lasted five years (late 2002 to late 2007) in the case of the S&P 500 and included the 2007 head fake! They coined it the lost decade for good reason: the indices moved sideways for many years. Hence, with this in mind, it's difficult to foresee a new bull market emanating from the wreckage of a one-month bear market. Really, really difficult!
OK, so how about scenario #2? Well, I said in my most recent article (A Dose of Reality) something to the effect that ‘America being America, expect the unexpected’. Referring to the hourly chart of the S&P 500 futures (chart 1), it’s clear that we already have a base, but this doesn’t preclude us from having an adjacent one (the first scenario) since the one on hand might not be wide enough (i.e., needs more 'wait-and-see' time). That said, what if we were to wake up one day to a totally unexpected surprise, i.e., an 'America-being-America' kind of surprise? And what if this pullback extends further down to test the neckline just in time for that surprise to catalyze orange wave 3 of red wave 3? Let me tell you: the thirds of thirds are literally unstoppable. In a nutshell, this is scenario #2, and for now, it remains a pipe dream.
Until we know enough, we'll continue to pick our spots.
Chart 1: the hourly chart of the S&P 500 futures depicting a base and a potential V-shaped recovery scenario (the pipe dream).
Chart 2: the daily chart of the S&P 500 depicting an adjacent base, a 'wait-and-see' triangle similar to that of 2019.
Peter Ghostine (@peterghostine)
Subscribe to 61point8.com's TriModel Framework and stay one step ahead of the U.S. stock market with my daily insights and ongoing technical analysis. Get real-time access to my high-probability trades. All published content is disseminated in real-time via the subscriber-only Twitter feed (@61point8) and via email (subject to Internet delays and mail server loads).
Live technical sessions are hosted regularly via GoToMeeting.
In early June 2019, I called for a major bear market to begin once the S&P 500 reaches ~3400 in 2020. I specifically cited "unknown reasons" that would only be identified retrospectively. Watch the shortened version of the forecast: The Supercycle's Fourth Wave.