SPX trend line breach may signal breakdown point
Updated
If you've been following my previous thread, you know that I've been watching the 50-day EMA and the 200-day EMA as possible reversal levels for this rally in the S&P 500. We eventually pushed past the 50-day (green curve), but yesterday we got rejected from a test of the 200-day (dark blue curve), and now we've violated the upward trend line (light blue line) that SPX has formed on its hourly chart over the last month. (In addition to technical resistance from the 200-day EMA, we also hit a fib retracement level and a couple important psychological resistance levels on the fundamental side-- 20-22.5 forward P/E, market cap 140% of GDP-- so there are lots of reasons to reverse from here).
In my past experience with trend line breakdowns, the price often moves back above the trend line at least one more time, and then it either holds there or reconfirms the breakdown. That's already happened, as you can see on the zoomed-in chart:
It's possible that we will move above the trend line again and retest the 200-day EMA before breaking decisively below the trend line, but personally I have already purchased puts.
In terms of fundamentals, the overall news environment is starting to shift in a more negative direction, I think.
Over the past month, the market has been driven by government stimulus, decent tech earnings, and optimism around reopening. It has mostly shrugged off bad news such 30 million job losses, a spate of corporate bankruptcies, and a flood of worse-than-expected 1Q economic data.
Now, however, we're turning our attention to Q2. Q1 GDP fell only 4.8%, whereas Q2 GDP is forecast to fall 27.7%. The earnings numbers for Q2 are going to hurt a lot more than those for Q1, especially due to companies' high borrowing costs. Analysts are also predicting another rash of bankruptcies and debt offerings in May. Cities and states may announce new taxes to offset budget shortfalls.
Meanwhile, the Fed is out of interest rate ammunition and slowing its balance sheet expansion. There's a bailout for oil likely coming in the next few days, and possibly an infrastructure bill in the longer-term pipeline, but federal stimulus is slowing down as the economy reopens.
And if China's experience is anything to go by, reopening will be slow, with lots of logistical bottlenecks and false starts. Demand will stay weak because consumers are out of cash. Some states will reopen too early and have to go back into quarantine within a few weeks. I think we will retest the March low in coming months as investors realize the scale of the economic damage and that it's not a temporary thing.
Big tech, I think will continue to outperform due to persistent fear of Covid-19. Airlines and cruise lines will continue to struggle, with some likely filing for bankruptcy in the coming year. Banks will remain hard-hit and highly risky due to continued default risk.
In my past experience with trend line breakdowns, the price often moves back above the trend line at least one more time, and then it either holds there or reconfirms the breakdown. That's already happened, as you can see on the zoomed-in chart:
It's possible that we will move above the trend line again and retest the 200-day EMA before breaking decisively below the trend line, but personally I have already purchased puts.
In terms of fundamentals, the overall news environment is starting to shift in a more negative direction, I think.
Over the past month, the market has been driven by government stimulus, decent tech earnings, and optimism around reopening. It has mostly shrugged off bad news such 30 million job losses, a spate of corporate bankruptcies, and a flood of worse-than-expected 1Q economic data.
Now, however, we're turning our attention to Q2. Q1 GDP fell only 4.8%, whereas Q2 GDP is forecast to fall 27.7%. The earnings numbers for Q2 are going to hurt a lot more than those for Q1, especially due to companies' high borrowing costs. Analysts are also predicting another rash of bankruptcies and debt offerings in May. Cities and states may announce new taxes to offset budget shortfalls.
Meanwhile, the Fed is out of interest rate ammunition and slowing its balance sheet expansion. There's a bailout for oil likely coming in the next few days, and possibly an infrastructure bill in the longer-term pipeline, but federal stimulus is slowing down as the economy reopens.
And if China's experience is anything to go by, reopening will be slow, with lots of logistical bottlenecks and false starts. Demand will stay weak because consumers are out of cash. Some states will reopen too early and have to go back into quarantine within a few weeks. I think we will retest the March low in coming months as investors realize the scale of the economic damage and that it's not a temporary thing.
Big tech, I think will continue to outperform due to persistent fear of Covid-19. Airlines and cruise lines will continue to struggle, with some likely filing for bankruptcy in the coming year. Banks will remain hard-hit and highly risky due to continued default risk.
Note
Huge Amazon earnings and guidance miss makes continued SPY downside likely tomorrow.Note
Trump is threatening a new trade war and has already imposed restrictions on semiconductors and airplane parts. Tech has been a bright spot heretofore; this could end all that. We may see a sharp downturn in semiconductors especially.As proof that I am a harbinger of doom for SPX, I hit 666 followers today...
Note
My puts doubled in value this morning. SPX hourly RSI is now officially below the neutral 50 level.Note
Note
I took profit at the 50-day EMA and will re-add puts on the bounce.Note
SPX is nearing the 200-day exponential moving average again. My guess is that it will move upward through the 200 EMA, then peak and move back down again. However, the move down may not last more than a day before we move back up and confirm a bullish break of the 200 EMA.Why am I suddenly thinking we might make a bullish move through this critical moving average? Well, I've been taking the temperature of the market, and it seems like some of the bears are starting to capitulate. Also, some of the bad news I was expecting has failed to materialize. Household bankruptcies were down 46%(!) in April rather than up as I thought they would be. Demand for gasoline, theme parks, and cruise lines is returning faster than I thought. Trump hasn't made good on his threats to impose new tariffs on China. It's looking like government stimulus has worked, and the analyst predictions of 20% GDP growth in Q3 may not be as over-optimistic as I thought.
However, the next resistance for SPX is at 3025. If we do breach the 200-day moving average, then 3025 may be the near-term top. Valuations are just too high right now, and if bond yields show signs of recovery then I'd expect a lot of investor money to flee stocks to the safety of bonds.
I also think it's likely that we will see a huge resurgence of Covid-19 cases (the first signs of which have already appeared) as the economy reopens, and within three weeks there may be a lot of pessimism around the prospect of a "second wave." Models show we could avoid a second wave if 80% of the population follows CDC guidance to wear masks, but people are stupid and popular resistance to masks is strong.
We might see the SPX repeat its range from 2019 for a while.
Note
Looks like stocks may be reacting faster than I thought to news of rising cases as economies reopen. European stocks were down because the UK is imposing travel quarantines, and US indices are set to open lower as well.Note
SPX broke below all three EMAs. Now we'll find out whether it holds within the range I identified, or whether it enters a major new downtrend.Note
The SPX broke below the range. FINALLY it looks like this market will do the rational thing and correct these all-time high valuations. With luck, we will get a retest of the March lows that will afford on opportunity to start taking a long position.Note
Well, obviously the SPX didn't hold below the range after my last update. It has surged all the way to the top of the range, from which it got rejected this morning.
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