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