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US Stock Market Enters Twilight Zone

The US stock market has rallied substantially since the bottom on March 23, 2020.  Our Adaptive Fibonacci Price Modeling system is showing us just how fragile the US stock market and certain sectors of the markets really are right now.  What’s going to happen next and how should you prepare for the next big move?  Let us try to explain our beliefs.

First, the US stock market bottom just as the US Senate and Fed announced major stimulus packages designed to support the collapsing markets.  Everything done prior to the March 23 date was “fodder” as the risk to the global markets was far greater than anything the US Fed or global central banks could muster.  On March 23, the US Fed initiated an unlimited asset purchase program to support the failing markets.  This changed the perspective of traders/investors immediately – but it also created a massive risk factor that few even considered. For a complete timeline on the US Fed actions, review this link.

Our own research team was calling for a breakdown in the US and global markets many months in advance of this move – even before the world knew about the Chinese/Wuhan virus event.  Take a look at some of our research posts from the past

January 26, 2020: The Black Swan Event Begins

January 29, 2020: Are We Setting Up For A Waterfall Selloff?

February 18, 2020: Is The Technology Sector Setting Up For A Crash? Part II

Less than 3 days prior to the massive selloff event, we posted this:

February 24, 2020: Has The Equities Waterfall Event Started Or A Buying Opportunity?

Today, we are posting this research article to highlight the unique setup in many of the major US stock indexes and sectors.  Using our Adaptive Fibonacci Price Modeling system, two things become clearly evident in the charts…

A.  Price must hold above support levels (the upper TRIGGER ZONE level and/or the GREEN Fibonacci Trigger level on the right side of the chart) in order for the uptrend to continue.

B.  Price has already reached (in most cases) the CYAN Fibonacci projected target level and this level may turn into major resistance pushing the price back into a downtrend.

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DAILY SPY CHART

This first Daily SPY chart clearly highlights the setup we are describing.  First, take a look at the CYAN line on the chart near the 282.97 level.  This Fibonacci target level becomes support when price moves above it and becomes resistant when price moves below it.  Currently, the SPY is trading very near to the 283 level and we believe this level may turn into massive resistance over the next 5 to 10+ days.

Secondly, take a look at the TRIGGER ZONE on this chart (a price zone drawn between the Bullish and Bearish Fibonacci price trigger levels).  This zone represents a very dangerous price area where the overall price trend may change directions and where volatility could explode. As long as the price stays above this zone, then moderate bullish price activity should be expected.

If the price falls below this zone, then moderate to strong bearish price activity should be expected.  The reason why the downside risk is much greater than the upside potential is because of the recent downtrend in the market that sets up a “recent higher high” near 295.50.

MONTHLY SPY CHART

This Monthly SPY chart highlights the longer-term Fibonacci price analysis.  The extreme breakdown in price has already broken below the RED Fibonacci Bearish price trigger level near $300 and broken through the BLUE initial target level near $279.00.  The next downside price target levels are GREY, near $173.40, and RED, near $128.00.  Currently, the SPY price has rallied back above the BLUE target level and is stalling near $282~285.  This price level is already below the $300 Bearish Trigger level – which suggests further downside price activity in our future.

Additionally, pay attention to the “arcs” that are on this Monthly chart.  These are our proprietary Fibonacci Price Amplitude Arcs that show us where price may target based on a theory that each price trend creates “price amplitude waves” into the past and future.  Currently, the “4D” area on this chart is our most likely bottom area.  There is also a “1.618” GREEN price arc that is just above the current price level (near $292).  We believe this Green 1.618 level is acting as major resistance and that price will reverse back to the downside within a 5 to 10-day window.

WEEKLY TRANSPORTATION INDEX CHART

This Weekly TRAN, Transportation Index, chart highlights a similar pattern but also shows how much downside pricing pressure is still evident across different sectors of the markets.  Even though the ES, NQ, and YM have rallied to near 50% to 61% of the initial downside price move, the Transportation Index has only recovered to the 38.2% Fibonacci Retracement level.  This suggests that the US Fed and global central banks have poured capital into the blue chips and technology sectors while leaving much of the broader market bloodied and on the sidelines.

A similar type of setup is appearing in this TRAN chart.  The CYAN target level has been reached and the price has stalled just above this level.  The TRIGGER ZONE is clearly evident on the chart and the price is slightly above that level right now.  Very clear downside price targets are evident (RED, Blue and GREY) and any price move below $7565 will likely prompt a much bigger downside price move.  What we are seeing in the markets is that any substantial downside price rotation will potentially set up a much bigger downside price collapse in the US and global markets.

WEEKLY XLF CHART

This Weekly XLF chart, the Financial Sector SPDR ETF, sets up almost identical to the TRAN chart.  Deeper price targets, the price has already reached the CYAN target level and stalled recent downside price rotation, and a very real possibility that any downside price move could breach the Fibonacci Bearish Price Trigger Level near $21.

What happens if, suddenly, the US and global markets roll lower by 5% to 10% and a new wave of selling panics the markets?

CONCLUDING THOUGHTS:

The answer is that the US and global markets will attempt to reach the most recent low price levels, or one of the deeper Fibonacci bearish target levels on these charts, and attempt to find support (or true market value) before attempting any move higher.  One must understand that until price shows us that it is capable of rallying above all-time highs, there is still a very real risk that another downside price move could take place.

These TRIGGER ZONES are key to understanding where the fragile balance in price is located on these symbols. As long as price stays above this zone, then continued bullish price action should be expected. If the price falls below this zone, then more downside price activity should be expected.

If you pay very close attention to almost all of these charts, you’ll notice that the next Fibonacci upside price targets (above the CYAN level) are well above the most recent all-time high levels.  This suggests that price will have to rally well above these all-time high levels to qualify the next bullish price target.  It could happen if the global markets recover much quicker than we expect and the earnings/GDP damage is minimal.  But given what we believe is really happening throughout the world right now, the downside targets seem more realistic outcomes (unless the US Fed and global banks absorb $40 to $50 Trillion in global risk assets over the next 60 days.

Watch how the markets react to these price levels and how the longer-term price pivots setup on these Weekly/Monthly charts.  The price will tell us where it wants to go.  We just have to be on the right side of the move so we don’t get slaughtered by a sudden price move.

As a technical analyst and trader since 1997, I have been through a few bull/bear market cycles in stocks and commodities. I believe I have a good pulse on the market and timing key turning points for investing and short-term swing traders. 2020 is an incredible year for traders and investors.  Don’t miss all the incredible trends and trade setups.

Subscribers of my ETF Swing Trading Newsletter had our trading accounts close at a new high watermark. We not only exited the equities market as it started to roll over in February, but we profited from the sell-off in a very controlled way with TLT bonds for a 20% gain. This week we closed out SPY ETF trade taking advantage of this bounce and entered a new trade with our account is at another all-time high value.

Ride my coattails as I navigate these financial markets and build wealth while others watch most of their retirement funds drop 35-65% during the next financial crisis.

Just think of this for a minute. While most of us have active trading accounts, what is even more important are our long-term investment and retirement accounts. Why? Because they are, in most cases, our largest store of wealth other than our homes, and if they are not protected during the next bear market, you could lose 25-50% or more of your net worth. The good news is we can preserve and even grow our long term capital when things get ugly like they are now and ill show you how and one of the best trades is one your financial advisor will never let you do because they do not make money from the trade/position.

If you have any type of retirement account and are looking for signals when to own equities, bonds, or cash, be sure to become a member of my Long-Term Investing Signals which we issued a new signal for subscribers.

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

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The Great American Wall Of Worry – US Stock Market

Traders and investors all around the world is having trouble climbing over the wall of worry/fear with the US stock market, and rightly so. There is a lot of things taking place and unfolding that carry a high level of uncertainty. Let’s face it, who wants to invest money into the market when it’s hard to come by (high unemployment, banks are still extremely tight with their money, companies are nowhere near wanting to hiring new staff).

The hard pill to swallow is the fact that the stock market loves to rise when uncertainty is high. It’s almost doing it just to drive investor’s nuts who sold out near market bottom or recent correction. You must overcome the urge to short the market when the economy looks so bearish in the years ahead, and continue to trade with the trend.

Short Term Investing – Weekly Volatility Index Chart

Below you can see the fear index. The chart is self-explanatory showing where it should move next. But if you are not familiar with the VIX then here is definition by investopedia:

“The first VIX, introduced by the CBOE in 1993, was a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options. Ten years later, it expanded to use options based on a broader index, the S&P 500, which allows for a more accurate view of investors’ expectations on future market volatility. VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets.”

VixBottom

 

Weekly Investing Chart of the SP500 Index

After reviewing the VIX chart above which points to stocks nearing a level of selling pressure, then review the chart below we come to a conclusion that a minor pullback of 2-5% is likely to take place in the next week ortwo.

The divergence in the Relative Strength Index is a bearish sign for the broad market. While I feel a pullback is do and needed for the market to regroup, it is important to review the seasonality chart and know that we are entering one the strongest times of the year for stocks.

SP500Divergence

 

SP500 Seasonality Chart

Again, using the data from the previous two charts along with this graph clearly shows that a pullback in the stocks is likely going to be bought back up by the brave investors willing to override their fear and go with the trend. For more interesting charts check out my stock chartlists: https://stockcharts.com/public/1992897

 SP-Seasonality

 

The Wall Of Worry Conclusion:

In short, expect the stock market to correct in the next week or two. But once we get a correction of two percent or more, be prepared for buyers to step back in and buy things up into year end.

This WALL OF WORRY is about to GET HIGHER!

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Chris Vermeulen

Investors are fearful and that means higher prices are around the corner

Everyone knows people make mistakes when rushed to do something or if they are scared of something bad happening. We also know fear and greed is what moves the market each month, week, day and tick… So when the majority of investors are selling their shares at the same time you must recognize the psychology behind it and prepare for a low risk trading opportunity in the days that follow.

Stepping back and looking at the general vibe in the financial arena we hear about Quantitative Easing II coming to an end which should help the dollar gain strength again. A rising dollar means lower stock and commodity prices. Also keep in mind the United States is in so much trouble they will always have quantitative easing even if they are not calling it QE, that’s my opinion anyways…

 

In addition, everyone was talking about the saying “sell in May and go away”. Take a look at the chart of the SP500. The first session in May was the highest point and the SP500 has only gone down since then. The chart below shows my fear indicator and with the masses all selling in the month of May I have to think it’s getting ready to bottom and start another 5-6% rally from down here. Keep in mind I am more neutral on the overall market for the longer term. In the next month or two I figure we see higher prices from here but come August we could see the dollar bottom and stocks sell off in a more significant manner.

 

Last but not least, gold and silver…
Looking back in time and reviewing inter-market relationships with gold and silver I feel more and more investors are becoming bearish and moving their money into safe havens like gold and silver. Recently we saw a sharp pullback in both gold and silver. The price and volume action that took place was a clear sign of distribution selling meaning big money players taking money out of those investments. I see this pattern happen in stocks, indexes and commodities all the time and it generally warrants caution!

My trading buddy JW Jones over at OptionsTradingSignals.com has some very exciting ways to profit from these choppy market conditions with limited risk. If you are into options then check it out.

Typically we will see a few more new highs being reached which are quickly followed with strong selling. What happens is that the big money players allow the price to make a new high and that hits the headline news, CNBC, BNN etc…. drawing in new buyers and a surge of volume for the big money guys to sell into and exit their positions at the top. It also helps cover up their large volume selling.

Below is what I am thinking will take place in gold this summer.

 

Weekend Trend Conclusion:
In short, I feel the dollar will continue to slide lower, both stocks and commodities should have some strength over the next 1-2 months but after that all bets are off and it will be time to re-evaluate things.

The next week in the market will most likely make or break this outlook as the overall market is trading at a tipping point. Let’s see how this week pans out then take another look at the charts.

Get my trading reports free each week here: www.thegoldandoilguy.com/trade-money-emotions.php

Chris Vermeulen

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Are Stocks & Commodities About To Start Another Rally?

Over the past couple months everyone seems to have been preparing for a sharp market correction. Crazy part is that the SP500 dropped about 10% from the high and that is a typical bull market correction. The thing is… the stock market has a way of slowly unfolding making it look and feel minor, then before you know it, the correction is over and it’s back to an uptrend. That is kind of how this one unfolded.

The good news is that we caught the low risk portion of the correction locking in a 4.5% drop, and we are now in a long trade and in the money by 2.5% with very little down side risk at this point. Time will tell if this up trend is sustainable or not…

Now, let’s take a look at the charts…

Dollar 60 minute intraday chart
As you can see below the dollar looks to have started a breakdown today. If there is continued selling pressure in the next couple days then expect to stocks and commodities to move higher as the US Dollar drops. It is important to know that when a bullish pattern fails we typically see a very strong reaction in the opposite direction (down) catching the majority off guard and they rush to the door.

SPY Broad Market ETF – Daily Chart
A couple weeks ago we watched the market go into a free fall creating a washout bottom. From there we saw prices bounce back and retake my key moving averages. This gave us a bullish bias and dips should be looked at as buying opportunities. I will admit that stocks still have a long way to go before the masses are convinced. I feel we need to see the February and March highs get taken out first. Once they get taken out there should be strong buying as short covering (protective stops from traders who are short) causes a surge in buying pressure sending stocks sharply higher yet again.

My trading buddy David Banister at Active Trading Partners is starting to see small cap stocks come back to life. Money is starting to flow into these lucrative areas of the market and he is on top of things… This week’s trade is up 20% in less than 24 hours which is very exciting.

Gold Daily Chart
Gold has been moving up this year but the current price action is not really getting me excited to buy just yet. Recently we have seen strong selling volume and very light buying volume. My bias still favors higher prices but there is still a good chance we get another dip in the coming sessions.

Mid-Week Trading Conclusion:
In short, I feel as though the dollar will trigger the next wave of buying in stocks and commodities for the next week or two… We should see the dollar make a clean moving in either direction shortly and that will help guide my analysis, positions and setups. I hope this analysis helps you to see the market from a different perspective.

If you would like to get my mid-week reports free please join my free newsletter here: http://www.thegoldandoilguy.com/trade-money-emotions.php

Chris Vermeulen

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The Good, Not So Good, Bad & Ugly on the Indexes

Depending what type of trader you are and what you focus on the most for trading you could be either bullish or bearish on the stock market right now. The charts below show how the Dow Jones Industrial Average is bullish while the Small-Cap Russell 2K is bearish. Options expiration last week really mixed the market up as the market makers and the big money players manipulate stock prices in their favor.

Let’s take a look at the charts…

DIA – Dow Jones Industrial Average Daily Chart
Crude oil has been holding up very well the past couple weeks and that has had an impact on the Dow. Additionally IBM had a huge move up which accounts for almost 10% of the DJIA’s price action. Both these factors have skewed the Dow index to look bullish.

Currently the price is trading above the 5 period moving average after briefly tagging it on Friday and then bouncing higher. Volume has picked up indicating more people are exchanging positions because of a shift in sentiment. Remember the Dow represents only 30 stocks so it does not provide a solid view of the overall market strength.


SPY – SP500 Daily Chart

This index closed below the 5 period moving average with rising volume once again indicating a shift in trader sentiment. The SP500 is heavily weighted with financial stocks and with the financial sector under pressure last week it helped to pull this index down. The fact that it closed below the 5 period moving average is just a warning sign to be cautious. Overall trend is still up in this index.

QQQQ – NASDAQ Daily Chart
As you can see the technology heavy index (Nasdaq), there has been more selling going on. The Nasdaq closed below both key moving averages and is now testing the 20 period moving average which is the line in the sand before I’m bearish on this sector. Tech stocks are typically a good indicator for the overall health of the market and if it does not recover this week or if it forms a light volume bear flag then watch out below.


IWM – Russell 2K Small Cap Stock Index
Small cap stocks are usually the first to pullback in the market. As you can see there is a big difference between this chart and the Dow Jones…

Small caps has broken key moving averages and are now nearing the 50 period moving average which I figure will provide a small bounce or pause before crashing through it. But with the amount of selling volume happening in the small caps it could just drop through that level and keep on going. Only time will tell and its best to wait for a low risk entry point before taking a position.

Weekend Trading Conclusion:
In short, the major indexes are giving mixed signals. While the Dow and SP500 are still bullish, we are seeing tech and small cap stocks breakdown. If things work out like they have in the past then the market is truly starting to put in a top. It could still take 5-10 days to play out. Usually the market will get choppy with large up and down days back to back and volatility will rise which can be seen by watching the VIX. I am currently neutral on the market and waiting for a low risk setup to unfold.

You can get my trading videos, analysis and trade alerts by subscribing to my newsletter: http://www.thegoldandoilguy.com/trade-money-emotions.php

Chris Vermeulen