Market Analysis

It’s Not Over

The bull case is now obvious, easy Fed and a prospective China deal. What about the bear case? After all $SPX remains below the 200MA, and below the monthly 15MA and is reaching overbought readings now. I maintain: As long as markets remain below the 200MA the bear case still has merit and hence I’ll keep sharing observations that may be of interest in regards to potential downside.

There is a common perception that last year’s steep sell-off has wrought out the excess out of markets. Looking at yearly charts nothing could be further from the truth. Indeed yearly charts are highly suggestive that the recent rally will get tested at some point in 2019 and result in either a retest or new lows.

By way of background: Indices and stocks reconnect with their yearly 5 EMA in most years, but not all. What is extremely rare are multi year disconnects. A sign of danger are large percentage disconnects as we witnessed in 2018. These big disconnects produced the technical reversals. Yet, despite these reversals we have yet to see actual reconnects.

Consider:

$NDX, still over 15% above its yearly 5EMA, has now not reconnected 2 years in a row (the year is young):

$SPX is a bit of a stunner, only 1 reconnect in the past 6 years (2016) now disconnected 3 years in a row, currently 10% above the 5 EMA:

A retest of or near December lows would accomplish a reconnect.

My favorite: $MSFT, has reconnected every single year except two, 1999 and 2018 and now is still disconnected and 25% above its yearly 5 EMA:

$AMZN, even the killer stock reconnects in most years, now on its 2nd year in a row without a reconnect. Heck of a rejection candle in 2018. Still over 25% above its yearly 5 EMA:

$NFLX, 33% above its yearly 5 EMA suggesting that $222 may perhaps be a better potential long entry than $333, but we’ll see:

Think it’s only tech? Try financials. Here’s $JPM, now disconnected 3 years in a row which has never happened before.

That’s another stock 15% above its yearly 5 EMA.

I trust you get the message: There hasn’t even been a basic reconnect with yearly 5 EMAs. Solid bottoms don’t historically come from ABOVE the yearly 5 EMA, they come from either tags/reconnects in a bull phase or they come from much below following a bear market.

To think that lows are in on charts that show 2-3 years of yearly 5 EMA disconnects into a slowing economy is a historical stretch. But hey, we’ll see.

Bottomline, these charts suggest that there is still substantial technical risk to the downside in 2019, especially as long as $SPX remains below its 200MA. And as long as it is, it’s not over.


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Categories: Market Analysis

6 replies »

  1. Great article. To the less technical, such as me, something just doesn’t “smell right”. When even Warren Buffet is buying back his own stock because he can’t find value to invest in, you know the jig’s up, Groucho

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