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In my last couple of posts I was writing about the rally scenarios on SPX and was saying that the recent lower high on SPX increased the chance that the retracement from that high was to finish forming a bull flag that would then break up into a minimum target at a retest of the rally high. The close last Friday back over the daily middle band was a pointer that SPX might be breaking back up, and that has followed through into a retest of the rally high, so that bull flag has broken up and played out. So where does that leave SPX now?
Well the first thing to say here is that the economic situation is not improving. The chart below is the Atlanta fed GDP forecast for Q2 2020 and at the moment that is looking like an expected Q2 2020 GDP in the -32% area. That is dire and it would be tempting to say that it is just deranged to think that stocks can head much higher in this environment. That said though, making money on stocks using economic fundamentals analysis has always been a chancy business and, while new all time highs directly from here look very ambitious, we could well see SPX go a bit higher before economic gravity drags SPX down to the lower lows that history strongly suggests will be coming in the next few months.
The miniature head and shoulders pattern beneath major resistance (the red horizontal) completed today. The topping pattern is massive, yet the battle is unchanged: it’s the Fed versus Truth. I can’t think of any plainer way to express the war that’s being waged in the equity markets each day. Here is the Dow Composite with the relevant mark-ups:
I was talking on Monday about the decent looking setup for a lower high on SPX, and so it proved to be. What next?
Well the rising wedge from the early May low has broken down and almost entirely retraced. There is some possible support here, but the trend down day that ES/SPX has delivered so far today may well see 2800 support broken and the next obvious move back into the 2750 area.
On Monday evening, I wrote a post to my Gold and Diamond subscribers pointing out, among other things, the irksome wall of support that was, apropos of nothing, supporting prices. In spite of weakness, it just kept hitting that wall and bouncing. When I turned off my monitors last night, the ES was down 24, but sure enough, it’s up double digits as I’m typing this. Because: Fed.
For me, although there are always of course bigger picture scenarios developing as well, the best way to view the market in the near term is to see it as a series of inflection points which generally have a more likely looking option for the next move, but can always break either way. My next to last post on Wednesday 29th April was at one such inflection point, within an uptrend move that was exhausted at the high that day, and delivered a solid retracement back to main support at the daily middle band, which then held and from there SPX has rallied almost back to the April rally high.
It’s been an exciting week, with wild moves, bold pronouncements about markets, terrible economic news, expectations about interventions by governments, the number of US confirmed cases of COVID-19 climbing over a million, deaths from COVID-19 in the US climbing over 60,000 and over 235,000 worldwide. Exhausting and TGIF.
So what happened on the SPX over the course of the week? Well SPX closed last Friday at 2836.74, and closed tonight at 2830.71, so it dropped 6.03 handles over the week. Like a rollercoaster it was a wild ride that ultimately stopped sedately back where it started.