Is this A Catchable Rally or A Bear Trap? by, Chuck Whitman & Mark Boucher

  •  
  •  
  •  
  •  
  •  

 

Using market internals* has a great advantage in that they force you to focus on what investors are doing rather than on what they are saying. Our short-term trigger point of the 70% down-volume on February 21 came just two days after the all-time highs on the S&P. In the following days, our Bear Market signal happened in the midst of five distribution days. Since that first warning day, the stock market had eight 90% down-days and three 80% down-days over the next eighteen trading days for the largest conflagration of intense one-sided selling panic sessions in market history. The last three weeks have beaten out previous records set by the two months of meltdown into the Oct-Nov 2008 momentum bottom of the GFC, the October 1987 crash, and even the infamous 1929 crash.

This decline continues to break records in stock market terms as well. First, the S&P moved from new all-time highs to a 20% decline in a record 16 days. It took just 22 days for the S&P to go to 30% down beating both previous records from the 1929 crash (31 days) and 1987 crash (38 days).

The market has been rioting for US fiscal policy stimulus and beginning with a 5% up circuit breaker being hit in Asian trade Monday night, it rose sharply as news hit that Congress and the Administration were close to agreeing on what now appears to be a $1.5 Trillion stimulus package. Since then, we’ve seen many global indices holding their lows from recent days and some important divergences. Both the Russell and QQQ’s are also holding their recent 3/23 lows along with the $SPX while $VIX and TLT are making key divergences.

 

 

The QQQ’s honored the 3/23 support level as the $SPX made new lows and now the rally has put the QQQs on the verge of a potential upside breakout over 185 that could signal a short-term bottom in this leading relative strength (RS) instrument. Courtesy StockCharts.com

One important element to continue to monitor for a catch-able rally is how credit spreads are behaving. We have watched credit-spreads starting to break out above key 2016 levels last week. Such a breakout with follow-thru above would be a very negative sign for the depth of the upcoming recession and a possible sign that the “everything-bubble” was starting to pop. On Monday, however, the Fed announced QE-everything allowing the Fed to purchase treasuries and corporate bonds so, in the last two days, junk spreads have started coming back from the brink of a breakout. If IEF/JNK and IEF/LQD can continue to come back to reasonable levels as markets continue to rally, that would indicate that the new Fed action may still be able to prevent a credit-crunch implosion – at least for now.

 

 

Junk spreads may be coming back from the brink of a negative breakout attempt on new Fed QE-unlimited. Courtesy StockCharts.com

 

 

The widening in BBB spreads versus Treasuries that started to blow out above 2016 levels from March 19-20 grew worrisome for creating a severe credit crunch. The spread has come back down sharply with recent Fed QE-unlimited and bond-buying policies announced. Courtesy StockCharts.com

 

 

The charts are showing lots of divergences in lots of indicators* such as in $NYHL and $SPXHLP after big volume explosion that normally correlates to important lows. Courtesy StockCharts.com

 

 

Some of our short-term models are turning, but some others have not yet turned. Here we can see !MCSUMRNYA got to deeply oversold levels, the !VMCOSINYA has issued a buy signal, while the traditional !MCOSINYA has not yet turned.* Courtesy StockCharts.com

No additional volume or breadth thrusts yet confirmed Tuesday’s 90% up-day as being a key inflection point.

 

 

Big volume resistance starts around 2700 on the S&P if the rally gains traction ahead. Courtesy StockCharts.com

 

 

The S&P regained the key 2340 level yesterday (Wednesday) with 90% up-volume above it, a very positive indication. Courtesy StockCharts.com

Tuesday’s impact on the Supply Index and Demand Index* was better than we’ve seen for a while with the spread narrowing more than 85 points to signal a strong demand day for the first time since the 2/19 peak. We’ve had some important divergences at recent lows including $VIX, TLT, $NYHL, $SPXHLP, New Lows, as well as in McClellan oscillators. Some of our short-term models turned positive Tuesday, but most have not quite turned yet – so we’ll want to see some follow-thru upside ahead.

We’ll look at our bear market bottom indicators in more detail later this week, but for now not enough of these are triggering just yet to suspect that Monday’s low was a major bear market bottom. A retest of that level in the coming weeks could change that view. With stronger hopes of a stimulus bill passing, tons of global policy actions, the $SPX regaining our key 2340 level on a 90% up-day, and the strongest Demand improvement (Tuesday) so far, this may be a great start to a potentially catch-able bear market rally. The Nasdaq and Russell are both near important range resistance that they’ll have to break through and hold for a rally to garner more traction ahead. Shorts are getting whacked too as you would expect at a temporary bottom here.

One problem with this new rally, however, is that it anticipates a quick passage of the stimulus package in Congress. The market sold off Monday when an expected stimulus package did not materialize over the weekend. Hope about the TARP rescue package led to a sharp rally initially in 2008 but Washington in-fighting kept the initial bill from passing which then led to a sharp decline and new lows. So, we’ll want to stay abreast of whether the stimulus plan really passes here or not.

Another problem with this new rally is that former laggards were among the biggest winners on Tuesday’s rally. Catch-able bounces usually feature some top RS leaders and not just bounces from former big losers. Some of the stocks that led on Tuesday included NVDA, AMD, and MSFT. Leading groups included ARKW (Internets), ARKG (biotech), and IVV (large caps) among others. Short-term traders could begin to watch stocks and groups that outperformed on the downside and over the past couple of days for bounces off support on intra-day charts. Beyond that, swing and position traders need to wait for confirmation from further upside follow-through in our short-term models and from subsequent action ahead. This does look like a potentially better start to a catch-able rally than anything witnessed during this short bear market so far. GOLD and VIPS are both positive according to technical scans and above the 50DMA too that could be setting up for mechanical trading positions if we get some confirmation of the corrective low here ahead as well.

On the coronavirus front, there are some indications that another wave of infections is spreading in Hong Kong and Singapore but the new cases seem to stem from people returning to the country rather than being homegrown. Nonetheless, we must watch for this kind of development in China, South Korea, Hong Kong, Singapore and other early coronavirus countries. We must also realize that any clearly negative coronavirus developments could trump positive stimulus actions or improving markets. When stocks can rally in the face of worsening news, however, that will likely mark an important inflection point. We’ll be watching closely for that in the coming weeks.

* We teach how to interpret internal market supply and demand along with the indictors cited in this article in our recent REED$TRADER Stock Market Timing Live-stream Workshop. If you missed it’s original airing, you can listen to the replay HERE.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top