Invisible Sun

I've been hesitating about doing another post on COVID and the impact on the economy, and likely further impact on markets this year, because in the run up to the US presidential election almost any comment on these issues seems to be taken as pitching in for one side or the other in the election. I'm a Brit obviously so will not be voting in the election as there was some kind of disagreement a couple of centuries ago that lost the UK the right to intervene in US politics, but I've been a bit concerned about having a post about COVID being seen as a statement of support for one side or the other. 

That's not the case, and for me this contest is mainly remarkable for the ages of the candidates, at 77 for Joe Biden, turning 78 close to the election, compared to Donald Trump at an only relatively youthful 74, and for the mental state of the candidates, with Biden appearing to be in early stage dementia, and very possibly Trump suffering from this too, though his behaviour has really been so erratic in the past that's harder to judge. Does the US really not have any presidential contenders young enough that senile dementia would not be a significant concern?

I'm planning a COVID post for later this week so I'll see if I can get through the more controversial parts of that now. The first question to address is whether Trump's administration has handled the COVID crisis well, and you would only need to look at my posts in late February and early March to realise that I thought then as now that the administration was very slow to become aware that there was an issue at all, and was then in strong denial about it until the crisis was well advanced. Management of the crisis since then has been frankly hit and miss. 

Does that mean though, as I have seen alleged, that the administration is therefore responsible for the 125k+  COVID deaths in the US so far? Not at all. That would assume that an early response could have avoided this pandemic, which is absurd. The only country that might have prevented this becoming a world pandemic was obviously China, and the only other player on the world stage that might have raised the alarm to co-ordinate an early international response to try to stop the pandemic was the WHO. Neither China nor the WHO took any meaningful action to prevent this pandemic at a time when it might have been nipped in the bud, and one of the most interesting questions over the next couple of years will be the investigation of why and how China and WHO failed to do that. It was never in the power of the US administration to prevent this. 

There also seems to be an underlying assumption that there will be a COVID-19 vaccine developed in a timeframe that might be useful. That seems doubtful, though some progress is being made on treatments that may save lives. The administration wasn't on the ball here, but it seems doubtful that an earlier response would have made much difference. If however US politicians could stop trying to blame each other for a crisis that none of them realistically could have prevented, and unite now to to coordinate a bipartisan way forward from here for the ongoing economic crisis created by this pandemic, that might potentially make a big difference, so it is dispiriting to see how little effort there has been from US politicians to come together in this time of crisis. Rarely can the US voters have been less well served by the politicians supposed to be representing them. 

On to the markets. 

On SPX the break below the daily middle band last week was confirmed, and that is now the key resistance area, now in the 3108 area, so in the 3096-8 ES area. That was tested in the last hour today and a break above would open a possible retest of the June high, though that might be overambitious. 

SPX daily chart: 

SPX tested the 50 hour MA in the 3080 area as resistance for most of the day, but that broke in the last hour today. That will be potential support to watch tomorrow (Wednesday). 

SPX 60min chart: 

The main index I'm watching here however is NDX, as it is that index that has the rising megaphone that seems to be defining market action at the moment. That appears to be topping out here, megaphone resistance is holding and a weekly RSI 5 sell signal has now fixed. 

NDX weekly chart: 

Now the question is what can we expect over the next couple of days, and helpfully both of the first two days of July this year have strong historical stats. 

Wednesday July 1st has 85% historical green closes on SPX, a bit lower at 76% on NDX. That's a very high number and what we might see, having tested and closed slightly below the daily middle band on SPX today, is a break up over the daily middle band. If seen that would probably deliver a retest of the all time high on NDX. 

What about Thursday 2nd July? Well given that the following day is a holiday I was expecting to see a bullish lean but that's not the case, with the historical stats on Thursday at 66.7% red closes on SPX, and slightly higher at 71.6% on NDX. If we see a green day on Wednesday that breaks back up over the daily middle band on SPX, then on Thursday we might well see a rejection back below to close the week. 

So much for the theory, what evidence is there to suggest that might happen?

Well it would be a very tidy fit with the rising wedges on the AAPL and AMZN hourly charts below, both of which look as though they are in a topping process, and in both cases looking as though a high retest and fail there would finish off the topping sequence nicely. We'll see if that delivers. 

AAPL 60min chart: 

AMZN 60min chart: 

A couple of announcements to finish today. A reminder first that we are running our July 4th sale at theartofchart.net at the moment and that will be running until the close on Sunday 5th July. For the duration of the sale annual memberships are available for the price of only eight months at the monthly rate rather than the usual ten and as ever with all our memberships, the membership rate will remain the same with no price rises for as long as the subscription is maintained. If you are interested then you can find the sale page here. 

The second announcement is that Stan and I are doing our monthly free public Chart Chat at theartofchart.net on Sunday 5th July. If you'd like to attend you can register for that here. 

Testing The NDX Resistance Trendline

Just a reminder before I get started that we are running our July 4th sale at theartofchart.net at the moment and that will be running until the end of next week. For the duration of the sale annual memberships are available for the price of only eight months at the monthly rate rather than the usual ten and as ever with all our memberships, the membership rate will remain the same with no price rises for as long as the subscription is maintained. If you are interested then you can find the sale page here. 

On to the markets. I was writing last week about the Janus (Bull) Flag targets at retests of the June highs on SPX, NDX, RTY and INDU and I was noting that NDX would likely reach that target first (done) and would then likely retest a major resistance trendline just above there afterwards (retested) and that the upswing on equities might fail there (possibly happening). Here is that updated NDX weekly chart. 

NDX weekly chart: 

I've been watching two key support levels on SPX and those are the SPX daily middle band, now at 3106, and the hourly 50 MA, now at 3112. Obviously those both broke this morning and for a confirmed break back below the daily middle band, that needs a daily close below the middle band today and a confirming close below tomorrow. If that is seen then this high on equity indices may be in and they may be starting a sizeable move down. There is another big support area below the daily middle band on SPX worth watching and that is the 200dma, currently in the 3020 area. 

SPX daily chart:

On the hourly chart there is no negative divergence and no obvious topping pattern which isn't ideal. Some secondary support at the hourly 200 MA tested at the lows so far today. 

SPX 60min chart: 

On the 15min chart the RSI 14 sell signal that formed at the high yesterday has reached target and a retest of today's low would set a possible RSI 14 buy signal brewing. I would note the fixed double top target in the 3000 area that could be reached on a lower low today.and a possibility that SPX is getting towards the end of a wave C down on a bullish triangle that may be forming here. The lower high also raises the possibility that a bull flag may be forming here. 

SPX 15min chart: 

Overall the high may be in and NDX may be starting a move back to the rising megaphone support trendline currently in the 6900 area. However more evidence is needed, I'm looking for reversal patterns to form, and it is still possible to see those retests of the June highs on SPX, RTY and INDU, which could be forming bull flags or triangles to deliver those at the moment. I like the prospects for a rally tomorrow and in the event that we see lower lows towards the close today on SPX I'll be watching for a possible long entry. 

Planning at the moment to do another post on Friday.  

Janus Flag Targets

On Friday afternoon. in the webinar I posted on my twitter, I was talking about the either way setup that had formed on equity indices with the formation and break down from head and shoulders patterns on SPX, NDX, RUT and INDU. I noted that on this setup there were only two strong targets to watch, and that was either a move to the H&S target, on SPX a retracement to the May low at 2766, or a rejection back up into a retest of the June high. In the case of the rejection that would be a pattern that I would call a Janus (Bull) Flag, I see a lot of these and they make the rejection/retest target 80% to 90% of the time. When the target isn't reached there is often a near miss. 

The H&S patterns have since all failed, so the Janus Flag targets are fixed on all of those indices and in the absence of strong evidence to the contrary, I'm expecting those targets to be reached. 

SPX 60min chart: 

On the SPX daily chart the close on Friday was a close just under the daily middle band that confirmed the close below on Thursday, but since then the close back above the daily middle band on Monday and confirming close above yesterday have re-established the daily middle band, currently at 3077, as support. SPX is currently breaking and trying to convert the next big level at the 50 hour MA, currently in the 3116 area, to support. A conversion of this level to support should open a retest of the June high. The upside is supported by an hourly RSI 14 buy signal that is still some distance short of the target level at 70 on the SPX hourly RSI 14.  

SPX daily chart: 

There is a potential bump in the road though, and that is that NDX has been considerably outpacing the other indices on the way back to the high retest. That is a potential issue because main rising megaphone resistance on NDX is only just above the June high. If NDX makes the Janus Flag target at the retest of the June high, and then reverses at that trendline then the other indices might not make their high retests. Given that the pattern is a rising megaphone though NDX might go through the trendline in a bearish overthrow that would allow all the targets to be reached. Either way, if NDX turns back towards rising megaphone support, then that is currently in the 6950 area. If there is a bearish overthrow of megaphone resistance first then I'd expect that megaphone support to be broken. 

NDX weekly chart: 

We'll see how that goes and if Powell can avoid any market boosting or busting public statements for a couple of days then we might even see those retests this week. 

A couple of announcements today. An hour after the close tomorrow Stan and I will be doing our monthly free public webinar at theartofchart.net looking at the big five stocks and key sectors. Tickers covered will be the usual AAPL, AMZN, GOOG, FB, NFLX, TSLA, IBB, IYR, XLE, XLF, XLK and XRT. If you'd like to attend you can register for that here. We've also just launched our annual 4th of July sale on annual memberships at theartofchart.net and for the duration of the sale annual memberships can be bought for the price of eight months at the monthly rate rather than the usual ten months. If you are interested then you can find details about that here. 

The Greatest Fool

It has been strange watching the markets climb higher in this tremendously strong impulse at the same time as the Fed and others have been talking about a possible contraction in world GDP this year of 25% or more, by far the worst world contraction on record, in the shortest time. I noticed an analyst tweeting about a conversation he had with a four year old last week about the markets where the four year old was talking about just buying in the expectation that an even greater fool would buy the position at an even more absurdly higher price in the near future. That seemed surreal, but the markets look increasingly surreal at the moment.

So the question is where the greatest fool might be found, the one that buys this bubble high, and the search for that fool might be over soon, if my NDX chart is to be trusted. Let's have a look at that.

On 20th May I posted an NDX weekly chart looking for a new all all time high, and ideally a test of the rising megaphone resistance trendline from the early 2016 low. This is how that NDX weekly chart looks now, with that megaphone resistance tested and holding so far. If that resistance holds then this collapse up from the March lows is either finishing or finished.

NDX weekly chart:

So what now?

Well there has been a sharp retracement from the high yesterday and that has broken the main rising support trendlines from the March lows on both NDX and SPX. That puts both into potential topping processes here and I'm looking for possible topping patterns to form, ideally involving high retests to set up double tops.

NDX 60min chart:

I would note that on SPX the gap down this morning has left a possible island top. I'm expecting a rally soon, though with buy volume at the time of writing just a whisker over 3% that may not start until after the close tonight, and the possible resistance I'll be watching above will be that island top gap, slightly above the 50 hour MA, currently at 3157 SPX. A break and conversion of the 50 hour MA on the rally opens a retest of the highs this week.

SPX 60min chart:

If that rally starts without SPX declining much further, and the low so far today is at a very decent support level at the daily middle band, then a high retest should set up a high quality potential daily RSI 14 sell signal and a possible double top setup that would look for the 38.2% fib retracement target of the move up from the March low in the 2850 SPX area. That would be a very decent topping setup, looking for a move to the next big inflection point area.

SPX daily chart:

What are the prospects for NDX reversing all the way back to the rising megaphone support trendline? Pretty good I think but we'll see. In the event that happens then that might well take the rest of the year and more, in a bear market that might last a couple of years or so. The high in 2000 delivered a 30 month bear market, and the 2007 high delivered an 18 month bear market. These things generally take a while.

There has been a lot of talk about a new bull market here that will last for years but there's no obvious reason to expect one. The economic news is dire, and getting worse, and it will likely take years to recover from this economic contraction. That's not my assessment, that's from the Fed.

Is the Fed going to wave a magic wand and make it all go away? Well they've been very clear that the answer is no. They are standing by to fix any liquidity issues but Powell has stated repeatedly that the Fed cannot intervene to stop an economic contraction. As the economic story this year is about an unprecedentedly fast and brutal economic contraction, that message seems clear enough, and at these levels that is not at all priced into the market. Over the rest of the year I'm expecting that to change.

Could I be wrong? Sure. The market doesn't do what I tell it to, but history says this market is in for a difficult period ahead, and wishful thinking about ever higher highs stretching over the horizon is something that is usually plentiful at big tops. Certainly no shortage of that around at the moment.

America Is Burning - Buy!

SPX made it to the 3100 area as expected, and a bit higher, and is now at the last big inflection point area before a retest of the all time highs. Why is this a big area? Well this is the last big fibonacci retracement level, and there are two significant high levels here, the first rally high after the all time high at 3136.72, and the November 2019 high at 3154.26 made on the move up to the all time high. A break over these levels is fine, but if 3154.26 is converted to support then that opens the way for a possible test of the all time high at 3393.52. That's a real possibility now, but we should at least see a retracement from this area.

SPX daily chart:

In terms of the SPX hourly chart, SPX has now arrived and is testing an ideal possible rising wedge resistance trendline. As this is a rising wedge that can overthrow at the high, but on a break below rising support, now in the 2980 area, we should at least see a decent retracement into established support in the 2760-70 area, close to the 38.2% retracement of the rally so far. A higher high on SPX today should set up a strong hourly RSI 14 negative divergence.

SPX 60min chart:

On the 15min chart the smaller rising wedge from that established support and specifically from the May low at 2766.64 is also looking good and the low yesterday was at that rising wedge support trendline.

SPX 15min chart:

The NDX chart is concerning me a bit here as NDX has been lagging SPX the last couple of weeks. The minimum target at the retest of the all time high has now been reached, but the ideal target at a test of rising megaphone resistance, now in the 10,150 has not yet been reached, and might need to be. Watching for signs of reversal.

NDX weekly chart:

Unless something really unexpected is happening SPX should be topping out here for at least a decent retracement. If that delivers the next big inflection point would likely be at the retest of the May low in the 2766 area. To set up that move might well require a decent initial retracement back into the 3000 area and then a retest of this high to set up negative RSI 14 divergence on the daily chart.

Stan and I are doing our monthly free public Chart Chat covering the usual wide range of markets and instruments at theartofchart.net on at 4pm EST Sunday. If you'd like to attend you can register for that here.

Staying On Target

I tweeted an excerpt from my premarket video on Thursday last week where I was talking about the ideal path for ES over the coming days and the plan was to see a high respecting a trendline then in the mid-3060s, seen on Thursday afternoon, then a retracement into the 3000 area, seen on Friday, and then a push into 3100 area for the middle of this week, currently in progress. With the historical stats for today and tomorrow both over 70% green on SPX, I'm thinking that level might be seen before the close tomorrow. We'll see.

In the short term I have short term wedge resistance on the SPX 15min chart in the 3085-90 area, and that is the next obvious target.

SPX 15min chart:

If that hit is tomorrow then that might be hit with my (currently still theoretical) larger rising wedge resistance, currently in the 3100 area, with the IHS target also satisfied there.

SPX 60min chart:

On the bigger picture the other main target that I am watching here is the rising megaphone resistance on the NDX weekly chart. I would very much like to see that target hit for an ideal short setup and NDX will need to pick up the upward pace to make up for last week's underperformance.

NDX weekly chart:

As this high forms I will be looking for negative divergence on the SPX hourly RSI 14 and the SPX daily RSI 5, ideally with some NYMO divergence.

SPX daily chart:

Support on SPX is at the 5dma, currently at 3031, the weekly pivot at 3027, the hourly 50 MA, currently at 3004, the 200dma, Friday's support and currently at 3003, with the other support on a clear break below 3000 at the monthly pivot at 2960, main rising channel support, currently in the 2940 area, and the daily middle band, currently at 2931.

Will we see a high when we make these targets? I think that's likely yes, but it may take a while topping out and history suggests that SPX might be at the top end of a trading range that could hold SPX for two to four months before a likely lower low under the March low.

What about the contrary view that the bull market in SPX will just resume now and plough ever upwards? Well you never know, but it seems unlikely, as well as having no historical precedent. The economy is in deep recession, and that isn't likely to improve soon. Forty million americans have lost their jobs so far this year, and that figure is likely to increase before it starts moving down again. It seems like a strange kind of dark miracle under the circumstances that SPX has rallied this far and that I am looking for a new all time high on NDX today or tomorrow. I'll be surprised if this levitation lasts much further and if SPX does go into a trading range for the summer, that will give some more time for the grim economic reality to bite. Still expecting lower lows as that happens but keeping an open mind. This is a strange market and has been for years.

That said though the Fed has made it clear that they are standing by to help with any liquidity issues, but that they will not be helping with any economic contraction. As the next few months look mainly to be about a harsh economic contraction, it may not be that the Fed will be helping much with that. We'll see.

Stan and I are doing our monthly free public Chart Chat at theartofchart.net on Sunday. All are welcome and we'll be looking at the usual wide range of instruments across all the main trading markets. If you'd like to attend you can register for that here.