The Dow 30 (YM), S&P 500 (ES), Nasdaq 100 (NQ) and Russell (RTY) E-mini Futures Indices are in danger of being swallowed into their respective moving average “Alligator” formations (where the moving averages are offset into the future), as shown on the following daily charts.
If price is engulfed within and falls below these formations, we’ll see high volatility and wild swings ensue, with a possible correction in equities.
Watch for moving average crossovers to the downside, beginning with the green (5MA, -3) below red (8MA, -5), followed by the red below blue (13MA, -8) to gauge weakness and a potential pullback/correction. At the moment, the only E-mini Index where the green has dropped below the red is the RTY (although the other three are a hair’s width away from also crossing), so it is the one to watch the closest in the coming days/weeks as a possible leader in weakness and move away from riskier assets.
As an aside, now that a tentative truce and agreement to halt further escalations in their trade war seems to have been struck between the leaders of the U.S. and China in this weekend’s G20 summit in Japan, we may see a tepid rise in equity markets.
However, any sustainable strength may be dampened by a reduced likelihood of any kind of substantial rate cut, if any, by the Federal Reserve at their next meeting on July 31.
If equities do rally, the S&P 500 Index (SPX) will, again, run into resistance around 3000 (a +3 standard deviation of a long-term uptrending regression channel), as shown on the following monthly chart. Price may overshoot to around 3047, which is a 261.8% External Fibonacci level.
To gauge such strength of any upside move, keep an eye on the SPX:VIX ratio.
The following monthly ratio chart shows that price closed out the first half of 2019 just below the 200 New Bull Market level. Furthermore, you’ll see that the monthly price swings on this ratio are at variance with those on the SPX. Whereas the SPX has made a series of higher swing highs since the beginning of 2018, the SPX:VIX ratio has made a series of lower swing highs, which puts into question the sustainability and strength of any further rally in the SPX.
Looking at the following three charts of the SPX:VIX ratio, you’ll see that each timeframe tells a different tale.
While the first chart (each candle represents a period of one year) appears very bullish for the first half of 2019, the second one (each candle represents a period of one quarter) shows that volatility increased substantially from Q1 to Q2, and Q2 closed on a great deal of indecision. The third chart (each candle represents a period of one month) highlights the lower monthly swing highs, as mentioned above.
Looking forward to Q3, I’d take a shorter-term look at the daily chart of the SPX:VIX ratio, as shown below, along with a couple of technical indicators.
Firstly, if this ratio crosses and holds above 200 to support any renewed rally in the SPX, we could see this ratio reach as high as 220-230, or so, which is a resistance level represented by the apex of a triangle formed by its 2-year price swings. That level would also converge with a 127.2% external Fibonacci retracement level and channel median shown on the above monthly ratio chart. If that level is hit, then the SPX may have reached a price of 3047, as I described above.
Furthermore, in support of such a scenario, it will be important for the RSI to remain above 50, and for the MACD and PMO indicators to remain bullish on this timeframe.
Otherwise, we may see the SPX falter and be engulfed by its “Alligator” to drop as low as 2600, or lower to 2400, as I described in my post of June 2.