Market Analysis

Drawn and Quartered

Off to the new quarter we go. The last quarter was historic, it had a massive blow-off top fueled by cheap money andexuberant optimism ignoring all the negatives and technical warning signs, even coronavirus was initially ignored. Already known in January it didn’t stop the momentum and produced new highs into big technical warning signs before the rug got pulled all too crudely following the February 19th high.

We all know the history. The most brutal crash since 1929, but also a massive recovery rally for month end and quarter end mark ups and now this new quarter starts again on a sour note. But despite the big recovery rally the verdict is clear: Bulls got drawn and quartered in Q1.

Many uncertainties remain, that goes without question.

But do the quarterly technical charts offer any insights and perspective here? I believe they do and they are well worth musing about.

Specifically I want to focus on a simple view: Key index charts with 2 key moving averages. The quarterly 5 EMA (exponential moving average) and the 20 MA. Why these two? Because they have proven time and time again to be important to market charts.

In particular the quarterly 5 EMA is a regular companion of markets. Touches it in one way or the other in the very vast majority in all quarters either as support or as resistance.

Let’s start with the quarterly $SPX chart:

Look at all the history going back to 1974. The quarterly 5 EMA gets tagged in almost every quarter. Disconnects to the upside or downside that produce an entirely disconnected quarters are very rare. In variably the following quarter produces a reconnect. 2008/2009 was a notable exception, but of course then markets reconnected again.

The crash of Q1 was so intense $SPX disconnected extremely far from its 5EMA hence an attempt to approach it was a very reasonable expectation. But the disconnect remains.

Also of note is the quarterly 20MA. It does not get tagged very often, but when it does it is often a key point of support or resistance (see circles). The steep drop in Q1 initially below also goes a long way to prove how historic the sell off has been for its intensity. But also note how price managed to close the quarter above that 20MA. Support was defended.

So this poses an interesting juxtaposition. Bulls have defended the 20MA, but now have to prove they can stay above by the close of the 2nd quarter. To not be able to sustain this price suggests the 20MA would now then become resistance similar to the multi year bear markets in 2000 and 2008 implying much more pain is to come. Likewise bears must keep price below it before the end of the quarter or this bear market may prove to be over sooner than most think at this point.

I know we are far from the end of this new quarter. Lots can happen, new lows or massive chop, lots of news events to yet unfold. But the quarterly 5 EMA serves as an interim yard stick. Will a reconnect occur at some point this quarter? History assigns a very high probability. That EMA currently sits above 2700 on $SPX suggesting a technical reconnect rally will at some point occur.

If the reconnect happens this quarter then the quarterly 5 EMA will likely serve as initial resistance. The battle line is clear, bulls want to regain it by quarter end bears will want to defend it.

How likely it it that a larger rally will emerge at some point beyond what we just saw at the end of this quarter?

Well, a look at other index charts may provide some interesting perspective because, while $SPX managed to recapture its quarterly 20MA, other indices did not and the technical damage is much more pervasive.

Take the $RUT:

Horror show. Not only did the $IWM not manage to close above the 20MA, it didn’t even manage to get close and now the quarterly 5 EMA is crossing over the 20MA. That really happened only once in $IWM’s history, in 2008. But even then there was a rally to tag the quarterly 20MA and it proved resistance. Note too with $IWM how it tends to connect with its 5EMA on a regular basis.

As bad as $IWM is currently trading history suggests it has an appointment with both MAs this quarter, but the 5 EMA first. That doesn’t preclude  the possibility of new lows first or a retest of the lows, but there is a massive technicall disconnect on the chart and it will seek to reestablish balance at some point. What happens then will have to be debated at the time  based on the new facts on the ground.

$NYSE offers a similar picture:

This chart held its long term trend but the MA disconnects are just as brutal.

$DJIA, as $SPX, defended its 20MA, but now has dropped again below it:

Note how the 5 EMA proved resistance on the way down in 2008/2009. But it did reconnect each quarter, except at the very bottom. Not to reconnect from all time highs would be highly unusual, but then lots of things are unusual in these market conditions.

Finally $NDX:

Well, there’s your winner despite all the market carnage. Hasn’t even touched its 20MA yet and remains in touch with is 5EMA. Good news or bad news? It suggests at the very least that technically $NDX is still healthier than the rest, but it also risks that true market capitulation hasn’t occurred yet and $NDX still has work to do to the downside, unless $NDX manages to recapture its 5EMA in short order. If it does, then other indices have a better shot of at least attempting to reconnect with their 5EMA as well.

None of this is useful for day trading or immediate direction, but it informs about the larger technical picture and history suggests that indices will want to achieve at least a moment of technical rebalance. What happens then will decide the future direction of these markets for the rest of the year: Continue on a multi year bear market path, or make the disaster of Q1 a one time shock affair.

The quarter is just one day old. Lots will happen, but whatever happens, don’t lose sight of these big picture charts. Final note: Moving averages are by definition moving, so the levels will change throughout the quarter, but their message will not.


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Categories: Market Analysis

6 replies »

  1. Sven,

    Thanks for your honesty these last few rough weeks, and thank you for allowing me to post 4-5 times about the probability of China lying about the virus data. With MSM not publishing any rebutals to the China data, there was a good chance that investors would jump back into the markets too heavily and too soon thinking that the world would follow the magical V-shaped China virus and economic recovery they propodanda on a daily basis. US intelligence has not decided to tell the world what they have known for many months, “China Concealed extent of virus outbreak”. Be careful investing on China data folks, their data releases are hilariously dishonest and manipulative towards holding power over their populace…

    https://www.bloomberg.com/news/articles/2020-04-01/china-concealed-extent-of-virus-outbreak-u-s-intelligence-says?srnd=premium

  2. Now that is taking the long view, Sven, bravely and well done for that, thanks.

    It seemed to me that today was the first day that markets soberly reflected on where things are and where they are probably headed. Yes, we had the panic of a couple of weeks back then the silly bounce to keep your technicals happy 😉 Perhaps it was DJT getting serious that did the trick?

    If so, I would venture we will be revisiting the recent lows before the 5EMA. Looked like a lot of casualties were taken stopping the drop in last 15 minutes of trading today, probably bodes ill for tomorrow unless a rabbit is found in some hat.

    Your observations are so uncannily astute that I’m inclined to bet on touching the 5EMA before this quarter is out, but my logic and gut are both screaming that there will be significant pain before that happens.

  3. “Bulls have defended the 20MA, but now have to prove they can stay above by the close of the 2nd quarter. To not be able to sustain this price suggests the 20MA would now then become resistance similar to the multi year bear markets in 2000 and 2008 implying much more pain is to come. Likewise bears must keep price below it before the end of the quarter or this bear market may prove to be over sooner than most think at this point.”

    These are all good points for normal markets, not liquidations. The Net asset values of many ETFs are swinging wildly from reality- in other words the system itself may be breaking down. The market’s sole source of support- Stock Buy backs, is gone.

    And the support system for the US consumer is gone. Who will pay the rents for tens of millions of Americans? Answer- no one will. Who will pay their tens of thousands of dollars of Corona bills? -No one will. Expect anarchy coming to many US cities.

    When I see stocks like NVDA trading below $50 I’ll know it’s time to buy. This market is full of ten years worth of hot air.

    • There is an underlying truth to your observations, Dan.

      One effect of an adequate welfare state and affordable universal healthcare system is to insure societies from events like this. It is a cost civilised countries choose to pay both as insurance and as a moral fairness towards their society. USA has, largely, chosen not to pay this cost, preferring to increase the profitability of their business, industry and wealthy by lower taxation and regulation.

      It IS a choice. It has benefits and costs. Should USA join virtually all other wealthy developed nations in the civilised choice? Dunno. That is the decision of its citizens. Perhaps more pertinent: do THEY really perceive the choice? That is the failure of their politics and politicians.

      USA is looking like it will be paying an expensive cost for its lack of insurance. One that may cede economic pre-eminence to China fairly shortly. US anarchy? Mayhap, not sure yet, I see no clear signs of it from across the pond.

      Your comments on the markets and Sven’s analysis are, I think, good. These are strange liquidacious times. My only caution is that Sven’s TA calls tend be be more likely correct than my logic, lol.

  4. There’s no way the excesses of an 11 year bull market only produces a 1 quarter bear market. A grand bull market will sow the disaster of an epic bear market.

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