Market Analysis

Month End Rally?

Markets continue to be in disaster mode the likes we haven’t seen since the financial crisis. Intra-day volatility as high as during 1929, $VIX nearly as high as 2008.

Liquidations galore and no stability on markets as of this writing and no confirmed low. It’s all ugly and dangerous.

Nobody knows where this will all end as the so far all central bank back stops have failed and the economic fall out from the coronavirus crisis continuous to deepen. So risk remains lower, especially if $ES loses its .382 fib support:

That support has held for several days in a row now and the move from the upper monthly Bollinger band to the lower monthly Bollinger band is not unlike what we saw following the tops in 2000 and 2007. Except this move here is much more aggressive than we’ve ever seen.

Why? Because the shock is so big, the economic shutdowns so pervasive and sudden, and markets are dropping from an extremely overvalued and complacent long only mindset.

Ugly action for many trapped longs. But

But is there a case to be made for a month end (and quarter end rally)?

Looking at the chart above the conceptual answer is yes. In 2008 we saw a month end rally following the $VIX 89 print back then and the move produced a 20% counter rally to reconnect with the middle monthly Bollinger band.

Indeed looking at how pervasive the drop below the monthly Bollinger band currently is, technically and historically speaking at least, a case can be made that a damage repairing bounce into month end makes sense:

Typically deep penetrations below the monthly Bollinger bands produce these type of saving candlewicks into month end.

One challenge here of course is that $ES has now broken below the monthly 50MA. That said it did the same in 2011 and there were efforts to reconnect that ultimately proved successful.

So bulls have targets to aim at here: Reconnect with the monthly 50MA, reconnect with the monthly power Bollinger band. If history has any meaning here in our historic extreme times a sizable rally can emerge. But this also requires signs of stability emerging, liquidations to end, and buyers to show conviction.

But new lows cannot be excluded as a possibility first, hence a view of what could be support on new lows is key to understand as well.

As a reference here I offer the chart of the $DJIA as an example:

$DJIA is now the most downward disconnected from its 200MA since the financial crisis. It’s extreme making it subject to an eventual technical reconnect rally.

Also $DJIA has now entered a key support zone in that it’s entered the consolidation range of late 2016/early 2017. Indeed it is at key support now.

Also of note is its trend line structure. A trend line that was commonly ridiculed last year when I showed it as part of the megaphone pattern. Well, we had our liquidity driven blow off top and now here we are near the lower trend line. It’s still lower on $SPX, but the $DJIA version is now very close suggesting key support between here and the trend line.

Bottomline: While central banks and stimulus programs so far have failed to produce a sustained rally, history and technicals suggests one may be coming to fruition into month end.

The mystery for now remains from where and that makes it a positioning challenge. But don’t be surprised if a vicious snapback rally materializes.

What happens then is an entirely different analytical exercise. The 2000 and 2008 example suggest that counter rallies are a sell. But we’ll cross that bridge when we come to it.

Following today there are 9 more trading days left in the month. We’ll know more by then. For now it’s a day at a time.

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Categories: Market Analysis

9 replies »

  1. All this money printing, talk of bailouts & helicopter money has me very concerned about future stability. A former presidential candidate (1988, 2008, 2012) once said “gold is honest money, which is why dishonest men hate it.” Perhaps he was on to something we should all take heed of now. This is the end, my only friend, the end…..

  2. Alex jones will tell you where this economy is headed. Fake panic, then a rebound when we see it was just panic, but by then it will be too late for a real market rebound bc of int. rates going through the roof bc of the money printing. Inflation, great depression. Forced global innoculations. And dont say it cant happen. Nobody ever saw this coming. GET PREPARED. Not for the virus, but for what comes next. And dont give into the mark of the beast! America is the last free country. Keep it that way.

  3. This is the “systemic collapse” that I have been expecting for quite a while….I think the real crash is still ahead of us. SPX below 1000….

  4. Yes, but.

    I expect a sharp rally before the month is out (there has to be else it could be game over for this economic reality) but have a nasty feeling there could be significant more down before that happens, perhaps another 10 to 20%. Then, even with that rally, we could be back where we are today, in deep, deep, doodoo.

  5. Sven I agree it is way oversold, it looks market may have bottomed at SPX 2280 today. This crucial level held firm.
    In such case I am expecting 6-8 month rally back to 3300-3350 now. As usually it will break all bears along the way. Markets will part everybody with their money, it is their purpose, isn’t it ?.
    This rally should look and feel much like 2019 and should end with another mini crash around election. Breaking 2280 means total liquidation and in such case markets will be probably closed after next weekend. GLTA

    • “Sven I agree it is way oversold, it looks market may have bottomed at SPX 2280 today. This crucial level held firm. In such case I am expecting 6-8 month rally back to 3300-3350 now”

      While a major bounce might very well be in order, you really shouldn’t take this technical stuff as gospel. It works best under equilibrium conditions, not major breakdowns in society.

      When millions lose their jobs, and possibly millions die, I wouldn’t want to be long anything. But given the volatility I’m not short anything now either. This is not a market, it’s a liquidation.

      Preservation of capital is rule #1.

  6. So that’s it problem solved. Everyone stays home in quarantine. Trump, Mnuchin, Congress and Fed please stop / cancel any aid. The charts will recover the market


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