Market Analysis

Risk

2020 is off to the same start as 2019 ended: Trade optimism, liquidity injections and rising markets. I’ll offer a more in depth analysis in the days to come, but wanted to highlight corrective risk (what’s that?) in some charts, specifically in the yearly charts. Now that a new year has begun we can see the latest data points and they highlight the size of corrective risk in markets.

None of these corrective risks preclude the possibility of still positive markets this year, but frankly that’s a separate discussion to be had as markets and data unfolds in the months to come. Rather I want to highlight the technical implications of some these charts.

For now markets are entering 2020 in max greed mode:

And it’s notable that these readings are coming on vast extensions of charts above the historic norm suggesting that corrective risk whether from here or higher up is substantial.

And before the log chart Nazis are all over me: I’m using linear charts here on purpose for clarity purposes. The points I’m highlighting make zero difference whether they are on a linear or log basis, so calm yourselves.

All of these charts will focus on the yearly 5 EMAs (exponential moving averages) and the upper Bollinger bands. Note all these levels will change over 2020, but they all have relevance and they spread across wide ranges.

Let’s start with $SPX:

The upper Bollinger band is currently at 3143. There is no year where $SPX does not at least touch that upper Bollinger band. $SPX is currently entirely above it.

The yearly 5 EMA is currently at 2817. There are years where the 5 EMA does not get touched. In most years the 5 EMA gets tagged. In most years with markets above the upper yearly Bollinger band there is a move that will at least pierce the area between the upper Bollinger band and the yearly 5 EMA.

Hence in principle $SPX has a corrective risk between 2816 – 3143 or up to 15%.

$NDX:

The upper Bollinger band is currently at 8206. There is no year where $NDX does not at least touch that upper Bollinger band. $NDX is currently entirely above it.

The yearly 5 EMA is currently at 7246. There are years where the 5 EMA does not get touched. In most years the 5 EMA gets tagged. In most years with markets above the upper yearly Bollinger band there is a move that will at least pierce the area between the upper Bollinger band and the yearly 5 EMA.

Hence in principle $NDX has a corrective risk between 7246 – 8206 or up to 18%.

$DJIA:

The upper Bollinger band is currently at 27991. There is no year where $DJIA does not at least touch that upper Bollinger band. $DJIA is currently entirely above it.

The yearly 5 EMA is currently at 25168. There are years where the 5 EMA does not get touched. In most years the 5 EMA gets tagged. In most years with markets above the upper yearly Bollinger band there is a move that will at least pierce the area between the upper Bollinger band and the yearly 5 EMA.

Hence in principle $DJIA has a corrective risk between 25168 – 27991 or up to 13%.

Recently I spoke about $AAPL and $MSFT corrective risk. Here are the updated yearly charts for 2020.

$MSFT:

What’s the technical term here? Holy crap?

The upper Bollinger band is currently at $133. There is no year where $MSFT does not at least touch that upper Bollinger band. $MSFT is currently entirely above it.

The yearly 5 EMA is currently at $120. There are years where the 5 EMA does not get touched. In most years the 5 EMA gets tagged. In most years with markets above the upper yearly Bollinger band there is a move that will at least pierce the area between the upper Bollinger band and the yearly 5 EMA.

Hence in principle $MSFT has a corrective risk between $120 -$133 or up to 25%.

$AAPL:

The upper Bollinger band is currently at $252. There is no year where $AAPL does not at least touch that upper Bollinger band. $AAPL is currently entirely above it.

The yearly 5 EMA is currently at $221. There are years where the 5 EMA does not get touched. In most years the 5 EMA gets tagged. In most years with markets above the upper yearly Bollinger band there is a move that will at least pierce the area between the upper Bollinger band and the yearly 5 EMA.

Hence in principle $AAPL has a corrective risk between $221-$252 or up to 25%.

None of this is to say markets can’t close higher on the year, but these charts suggestive sizable corrective risk some time during 2020 which may well prove to be buying opportunities, but the chart damage and context will have to be assessed then. Some of these corrective risk may turn out to be minor, in the 5%-10% range, but some of it suggests potential larger and most severe corrections which, in context of the larger structural backdrop may result in a bear market were they to result in larger technical damage (TBD then).

As it stands to be buying these indices or stocks here is to ignore all technical history and count on these charts not connecting with at least their upper Bollinger bands or worse: In the direction of their yearly 5 EMAs. If one is looking to buy the charts suggest better entry opportunities to come. For those interested in shorting these charts offer a rough roadmap as to potential corrective target ranges.


For the latest public analysis please visit NorthmanTrader. To subscribe to our market products please visit Services.

All content is provided as information only and should not be taken as investment or trading advice. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. For further details please refer to the disclaimer.

Categories: Market Analysis

7 replies »

    • Sven,

      Great writeup and analysis. I believe you meant AAPL, not MSFT in this sentence “Hence in principle $MSFT has a corrective risk between $221-$252 or up to 25%.”

  1. Interesting as always. If you have the time, I would really be interested to see how long it would take for the upper Bollingers or annual 5 EMAs to be touched if you just assume the SPX remained flat at its current level. In other words, rather than corrective downward action down to the bands and averages, how long would it take the bands and averages to catch up to the index if no further advances (or declines) occurred? Thanks as always.

  2. The only thing we know is that eventually….this is gonna end in a full disaster. Meanwhile, this could go the 3400, 3500….or end tomorrow. Nobody knows….this is pure casino.

  3. Agree the general principle but one flaw: the Bollinger bands and EMAs will move over time, as mentioned by FuriousA. They could still be touched later this year without the indexes dropping below today’s absurd levels. But when it does go it could be one helluva drop.

  4. Shite I should’ve listened. Just decided to sit out of the market this afternoon after weeks of getting stopped out and BOOM, the drop is here. Thanks for the analysis as always. I should know at this point that it is precisely when I get tired of getting stopped that is precisely the moment to be positioned all-in short. FML.

Leave a Reply to Billy Cancel reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.