- WE'RE JUST RANDOM SPECKS OF DUST IN A TORNADO TO THE MARKETS .......
- CHARTISTS MUST PUT ALL BIAS ASIDE AND LET THE CHARTS DO THE TALKING OR WE'LL SEE ONLY WHAT WE WANT TO SEE
- This blog has a copy of all header posts that I publish anywhere, so that those interested in seeing what my thoughts are on the markets can find them easily.
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Thursday, 9 July 2020

Quick Update On COVID and SPX

I was reading a very interesting article yesterday on the progress of COVID-19 and it was interesting not so much because of what was said, as for the decent quality numbers that it was quoting on COVID-19 exposures in the US population, and the fatality rate from the now decently sized statistical sample of exposed population and consequent deaths. In summary about 5% to 8% of the US population has now been exposed and are showing antibodies, and the death rate so far, subject to some likely attribution of deaths to other causes, is coming through at between 0.49% to 0.78% of those exposed. If you'd like to see the source article you can see that here.

If you haven't seen it before I'll be referring back to my 20th March post 'A Short History Of Superflu Pandemics' and so I'm linking back to that for reference.

Now I've said before that I'm skeptical about an effective vaccine or cure being developed at all, and in the event that there is an effective one developed, whether it will be widely available before 2022, by which time it would likely not be a lot of use. I will be delighted to be pleasantly surprised about that, but my working assumption is that the coronavirus will just run through the population in the usual way for these pandemics and then fade away as an issue.

On that basis, though I'm seeing estimates that 70% of the population would need to be exposed to develop herd immunity, my working assumption would be that number might be as low as 33% to 40% infected in the 1889 and 1918 pandemics, ranging up to the 70% number because in the 1889 and 1918 pandemics those who were asymptomatic were likely not counted and that may, as now, have been a high proportion. On that basis 5% to 8% exposed is just a decent start, and will likely need to rise at least four or five times by the time herd immunity is established.

The death rate at 0.49% to 0.78% is much lower than appeared likely in my 20th March and so is actually good news, though if there is no vaccine or cure, and the number of exposures needs to be as high as 33% to 70% of the population, then as many as another one to two million people in the US may die of COVID-19. That would likely happen mainly over 2020 and 2021 and, given that many victims of COVID-19 are in sufficiently fragile health that they would have died in that timeframe in any case, then would likely increase the 6 million or so deaths in the US expected in any case over that period to 7 million to 7.5 million.

That's a lot of COVID-19 deaths, but by historical standards would be a decent enough result. By those historical standards this might also be enough of a reminder that some basic preparations might be made for the next pandemic, as these do occur regularly, albeit infrequently, and it was a dispiriting moment for the ongoing search for intelligent life on earth that this pandemic caught governments all over the world so completely unprepared, despite being perhaps the most predictable natural disaster in the history of the human species in every regard except timing.

If this pandemic plays out as I'm expecting then COVID-19 will be a major issue for a while yet and the management of COVID-19 over the next year or two, having already caused major economic disruption since March, may cause much more disruption over the rest of 2020 and possibly much of 2021. Stan and I are going to be running a webinar in early August at theartofchart.net looking at investing and trading in this environment and as soon as we set a date I'll be mentioning that on my twitter and in my posts of course.

On to the markets

SPX has been consolidating choppily for the last couple of days and this morning has come close to delivering a backtest of the daily middle band. There are three important levels of support just under 3100 and they are the daily middle band, now in the 3099 area, and the monthly and weekly pivots, at the 3099 and 3098 levels respectively. That is a lot of big support in a small area and and any break below would be potentially significant. A conversion of 3100 to resistance would open up a lot of potential downside but I won't be getting that excited about that until we see it.

SPX daily chart:

Hourly RSI 14 sell signals on both of SPX and NDX fixed earlier this week, and while the 3100 area has been backtested as expected, I'd note that neither of those signals has reached target yet, suggesting that there is likely to be at least another significant downside attempt in the near future. In the very short term there are clear bull and bear scenarios here.

SPX 60min chart:

The bull scenario is shown on the SPX 5min chart below and that shows the rising wedge from the 3000 low that broke down earlier this week. The minimum 38.2% retracement target was hit almost exactly this morning and a high quality bull flag channel has formed that would look for a retest of the last high at 3184 on a break over flag resistance.

SPX 5min chart:

The bear scenario is shown on the ES hourly chart below, and I was outlining this possibility in my premarket video at theartofchart.net on Tuesday morning. I was talking about the possibility that ES would retrace back to the area of the possible H&S neckline at 3106, with the low this morning was at 3105, then form a right shoulder with an ideal high in the 3155 area, with the high this afternoon at 3154. This H&S is in play and on a sustained break back below 3105 overnight or tomorrow the H&S target would be in the 3026 area.

ES Sep 60min chart:

Which of these scenarios looks more likely? Well I think the bearish scenario is better one overall so all things being equal I'd give that 70% on the setup quality. All things haven't been looking that equal in recent months however, and the bulls have certainly earned the benefit of the doubt of late, so I'm giving both options equal weight for the moment and watching key levels. The key level on the upside is 3155 ES. A conversion of that to support tips this to the bulls with a likely retest of 3184 ES after that and a possible retest of the June highs. A break below 3100 SPX from here would likely tip this to the bears, subject to conversion of the 3100 SPX area to resistance, and would open a possible move down to a bigger picture target in the 2880 SPX area next month.

A couple of things to mention today. We are running another Traders Boot Camp at theartofchart.net starting on 3rd August teaching technical analysis and trading skills. These are mainly aimed at existing subscribers but are open to all and are comprehensive, include a lot of useful trading tools, and very cheap relative to an equivalent courses that I have seen online. If you are interested you can read more about that here.

The last thing to mention is that our Paragon Options Service trading options on futures and ETFs is up about 82% so far this year and has just closed a sixth green trade in a row. If you're interested we offer a 30 day free trial and you can read more about that here.

I'm planning a post tomorrow looking at the progress of the tech bubble this year and that gap that has been increasing between tech stocks and other stocks in US markets.

Monday, 6 July 2020

A Killing Joke

I was asked an interesting question yesterday in our monthly free public Chart Chat at theartofchart.net, and I'd like to talk a bit about that before I start looking at markets today. The question was whether, given that market prices reflect everything that is currently known at the moment about that market, then how can that price be mistaken? My reply was that if that was truly the case then the price of tulips in January 1637 (just before that bubble burst) would have been equally justifiable and that, further, if that was really true there would be no speculative bubbles, which clearly there are on a regular basis. 

Something I didn't add, and should have, is that while statements like this are often thought of as economic rules or even laws, what they are in truth is just working assumptions that contain enough truth that economic models can be built using them that will have some relevance in modelling the behaviour of a market that is infinitely more complex than that model. 

There is a lot of faith in markets and this is something I've talked about before. I remember talking to someone years ago about gold, with my companion telling me that the problem with gold was that it was only worth what someone would pay you for it. I replied that he had just missed having an important insight, in that while what he said was true, he had missed that the same was true of anything that could be bought and sold, and also true of anything used to buy or sell it. There is no such thing as absolute value, all value is relative and based on confidence. 

It reminds me of a joke that I read in the 1980s in the cult classic graphic novel 'The Killing Joke'. The Joker tells the joke to Batman and it goes as follows:

I've always remembered this joke and felt that it had something interesting to say about human psychology and the impact that psychology has on our interactions with the world around us. The other thing I said in response to something else in Chart Chat yesterday was that while it was crazy in the current economic background that SPX had recovered as far as it has, it wouldn't be a lot crazier for markets to go even higher, and that we might see that happen. Best to keep an open mind rather than to stand in front of a train which might not stop in time. We have to suspend our disbelief watching the market, just as we would while watching a film or reading a novel. 

On to the markets, where I said two or three weeks ago that the main barrier to SPX retesting the early June high was the main rising megaphone resistance on NDX as if that held exactly than SPX would likely have to turn back down without that retest. NDX closed over that resistance trendline on Friday so the path has been cleared for that retest on SPX and while it may not happen, I'm thinking that the odds of seeing that are now at 50% or higher. We'll see. 

NDX weekly chart: 

Now there is some negative divergence here. On the hourly chart there is now a possible RSI 14 sell signal brewing on SPX and we could see a turn. The main support is now well below at the daily middle band, currently in the 3107 area. SPX 60min chart: 

There is some important support a bit higher than that though as decent quality rising channels have formed from the last low on both ES and NQ. ES rising channel support is now in the 3137 area and I'm watching that carefully. ES rising channel resistance is now in the 3200 area and the retest of the June high could be reached this week within that channel. ES Sep 60min chart: 

A couple of announcements today. Firstly I'd mention that today is the last day of our July 4th sale on annual memberships at theartofchart.net, and if you are interested and had not got around to pulling the trigger for that yet, you can do that here until midnight tonight I think. 

Secondly Stan and I have decided to do a special webinar on the markets in the ongoing COVID economic environment. This is likely to have a huge impact over the next year or three and we will be looking at the markets, sectors and instruments that should do better or worse in this environment. This will be like the webinars we do at the end of each year and we will likely set a date for this in early August. As we approach that I'll mention that in my posts and on my twitter

Lastly if you missed the free public Chart Chat at theartofchart.net yesterday you can find the recording posted on our July Free Webinars page. 

Tuesday, 30 June 2020

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

Wednesday, 24 June 2020

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.  

Wednesday, 17 June 2020

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

Thursday, 11 June 2020

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.

Friday, 5 June 2020

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.

Monday, 1 June 2020

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.

Wednesday, 27 May 2020

In Between Days

SPX gapped up over 3000 this week and has been sustaining trade above it, with retracements. My working assumption is that SPX is on a path to reach my 3100 target area. So how is that looking on the SPX hourly chart?

Well I drew in two high quality possible rising wedge resistance trendlines on my SPX chart a couple of weeks ago and the first was resistance last week and then was gapped over at the weekend. I'm looking at the next one higher and if that was to be hit in the 3100 area, that would likely be towards the end of next week. There is already a possible hourly RSI 14 sell signal brewing but I'd expect SPX to need to go at least a bit higher to deliver a decently formed divergence. Main rising channel support is now in the 2900 area.

SPX 60min chart:
On the daily chart main support is at the daily middle band, also now in the 2900 area. I've drawn in the possible wedge resistance area that I'm looking at and ideally I'd  be looking for daily RSI 5 and NYMO negative divergence to have formed by the time that 3100 target area is hit.


SPX daily chart:
As well as IHS target on SPX in the 3110 area of course I am also watching the rising megaphone on NDX, which has been lagging so far this week. The main target that I am watching for here is on NDX at the test of rising megaphone resistance, that would require getting through resistance at the retest of the all time high before continuing up towards that higher target in the 10,150 - 10,200 area. NDX will likely need to pick up the pace a bit to get there.

NDX weekly chart:
In summary I am looking for both of these targets, 3110 area on SPX and 10,2000 area on NDX, ideally to be hit together near the end of next week or the start of the week after. We'll see how that goes.

Stan and I are doing a webinar an hour after the close on Thursday at theartofchart.net on FAANG stocks and key sectors.  If you'd like to attend then you can register for that on our May Free Webinars page.

Wednesday, 20 May 2020

Another Inflection Point

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.

Atlanta Fed Median GDP Forecast Q2 2020:
On the bigger picture the main resistance at this current inflection point is the SPX weekly middle band. That's currently in the 2960 area, backstopped by the 50 week MA in the 2998 area, and to go higher SPX bulls need to break the weekly middle band on a weekly closing basis, convert that to support, and then head to the then open higher target area around 3100.

SPX weekly chart:
On the NDX weekly chart that conversion was done weeks ago of course and as I've noted previously, the next obvious target on NDX is either a retest of the all time high, or a little higher into rising megaphone resistance currently in the 10,150 area.

NDX weekly chart:
Supporting that higher target area on SPX is also the perfect rising channel that was established from the March lows at the lows last week. That channel support is now in the 2820 area and rising at about fifteen handles per day. That support would have to break to open the downside.

SPX 15min chart:
On the SPX hourly chart a retest of this week's high would set up negative divergence on the RSI 14 and that might deliver either a full reversal or just a larger retracement than the one we saw yesterday. The support for that retracement would be the 50 hour MA, currently in the 2890 area, the 5dma, currently in the 2882 area, and the daily middle band, currently in the 2872 area. That 2872-90 range should hold on a simple retracement and, if broken, bears would need to confirm the break with a break of SPX rising channel support.

SPX 60min chart:
In terms of resistance, if we are going to see a reversal before a break up towards 3100 then I'd expect to see 3000 hold as resistance until then. The fixed sell signals currently on ES, NQ, RTY, YM, DAX & ESTX50 area are supporting that retracement so I'd be surprised to see that break up over 3000 before that larger retracement. Overall I think the odds to a test close to the 3100 area before we see a rally high are now about 60%, with 40% odds on a hard fail under 3000.

Stan and I are doing a webinar an hour after the close on Thursday at theartofchart.net on FAANG stocks and key sectors.  If you'd like to attend then you can register for that on our May Free Webinars page.

Wednesday, 13 May 2020

The Next Inflection Points

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.

SPX 5min chart:
In terms of the options I was talking about in Monday's post, a bounce directly from the 2800 test, supported by possible RSI 14 buy signals brewing on the 5min and 15min charts, would be a decent (ish) fit with the triangle option I was talking about then, though that positive RSI divergence would mean nothing until the end of the day if today remains a trend down day.

SPX 15min chart:
If, as would be more likely I think, a bull flag channel or megaphone is forming here, then there is a very decent looking flag channel support target currently in the 2750 area. I'll be watching that for support if reached.

ES Jun 60min chart:
If SPX can break below that, then there is a possible H&S neckline in the 2727 area. If seen that could deliver a right shoulder bounce that would have an ideal high in the 2880 area, and that would be a match with a backtest of the 50 hour MA and 5dma, both currently in the 2890 area, broken yesterday afternoon and now the obvious resistance above.

If the sequence of scenario options here is sounding a bit confusing I have sketched the arrows on the chart below for the obvious paths from here excluding the triangle option, and merging the bull flag and H&S right shoulder options as they would likely look similar until SPX failed at a 2850-2900 right shoulder backtest.

SPX 60min chart:
On the daily chart SPX has broken back below the daily middle band, currently at 2854, and needs a close below that today and tomorrow to confirm the break. If this is a bull flag forming then that then would need to be reconverted back to support on the next leg up to open the minimum bull flag target at a retest of the 2954.86 high, and maybe higher.

SPX daily chart:
I'd like to stress here that I'm just following the technical breadcrumbs and am not buying the argument here that a new bull market is in progress. That's a very poor fit with both the current economic situation and what has happened historically in these sorts of times. I do think that this rally could go higher before reality bites however. Historically rallies like this usually happen in this kind of situation, and historically they all failed into lower lows. SPX could go higher before than happens though. 

Stan and I are doing a webinar at theartofchart.net an hour after the close tonight from our series on trading commodities, looking at attractive trading setups developing at the moment. If you'd like to attend then you can register for that on our May Free Webinars page. If you're interested in more market analysis you can sign up for a 30 day free trial at theartofchart.net here. No obligation beyond the free trial and I do a premarket video every morning, with Stan doing a video after the close, and access to our private twitter feed with a lot of useful day and swing trading updates. 

Friday, 1 May 2020

Full Of Sound And Fury, Signifying Nothing

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.
I did a post earlier this week looking at past backtests of the SPX monthly middle band and the close yesterday at the end of April was a visually obvious close slightly back over the monthly middle band, which has been a rare event, so I've had a look at time when this has happened in the past and, with a warning that a statistical sample of four is really very small, here are the four comparable occasions when this has happened in the past.

Marginal visual closes back over monthly middle band

  • Q2 1939 - Close below following month, then six closes over mid band into lower high then lower low. 
  • Q2 1960 - Higher low following month, then retest same level and close below mid band, then lower lows
  • Q3 1981 - Direct fail into lower lows
  • Q1 2019 - Immediate conversion of middle band into support then higher highs

So what's the take-away here? Well three of these four obviously failed to deliver a new high before lower lows, and the 2019 sample is now looking suspect because on the first day of the next month SPX then opened above the monthly middle band and never closed a day back below it, something SPX has clearly already failed to manage here, but this close was strong enough to suggest that after this retracement SPX may be able to climb back over the middle band and trade above it for a while before then likely heading towards lower lows, which is what happened in the case of 21 of all the 24 backtests that I identified, and in 5 out of the 5 cases I was looking at where there had been an economic shock comparable to the one still being delivered by COVID-19.

Personally I still think the COVID-19 story is still playing out and, while the world may now be past the peak of the first wave of this, the crisis is both medically and economically a long way from reaching the rearview mirror. That said, that's just my opinion, and there are plenty of others that disagree, but they wouldn't be the first ones to seriously underestimate this:
On to the markets, how are we looking on the current retracement from Wednesday's highs?

On the 15min chart the rising wedge has obviously broken down and fell directly though the 2860 area I thought might deliver a right shoulder rally for an H&S. Looking at the chart that area might well be resistance for a rally on Monday, if we see one. The next really big level support on the SPX chart is the much larger possible H&S neckline in the 2727 area.

SPX 15min chart:
An hourly RSI 14 sell signal fixed after the high this week and has reached the possible near miss target. The hourly 50 MA was broken this morning and if we do see a rally back to the 2860 area on Monday, would add to the already impressive resistance there.

SPX 60min chart:
I'm concerned that the daily RSI 5 sell signal on SPX failed at the high on Wednesday, so that is no longer supporting this decline. I'd also note that the strong support levels at the daily middle band and the new monthly pivot are at 2791 and 2771 respectively, and both are important levels to watch. SPX daily chart:
This is a wild market but the standard minimum levels I'd be looking for an a break of a rising wedge like the one shown on the 15min chart above would be at the 38.2% or 50% retracement levels in the 2662 and 2572 areas respectively. There's some decent support below but particularly if the daily middle band can be broken and converted to resistance, these are the levels that I would be generally be looking for even in a retracement that then rejected into higher highs. If seen, the next serious inflection point area for SPX should be the 2550-2700 area.

Stan and I are doing our monthly free public Chart Chat at theartofchart.net on Sunday covering the usual wide range of equity indices, bond, forex and commodity markets. If you'd like to attend you can register for that on our May Free Webinars page. Be there or be unaware! Everyone have a great weekend. :-)

Wednesday, 29 April 2020

The Power Of Faith

I have a gap in my work schedule this morning as we wait for the Fed this afternoon, so I thought I'd do a quick update on the inflection point that SPX has reached today, and talk about why the still very pervasive faith in the power of the Fed to keep asset prices up should not just be dismissed as irrational.

For me I look at the Fed and I know that I don't see what most others seem to see, as I see a track record of successively larger failures that have created a Fed seemingly capable of trying anything to try to keep asset prices high, for fear that a serious decline in asset prices might unleash an economic whirlwind that they could not hope to control. They have my sympathy but, based on their track record, not my respect, and here is my image choice for the Fed today. If you're enjoying some of the great demotivational posters that I've been using in a lot of my recent posts, and on and off for much of the last decade, check out the author website at despair.com for some good laughs and amusing gift ideas.
That said, the power of Fed may not be impressive, but the power of the strong faith in the power of the Fed might be. I'll explain why that is.

A decade or so ago I was chatting to someone on a blog and that person said to me that the problem they had with gold was that it was only worth what someone would pay for it. I replied that they had come very close to a very important insight about the markets, and the insight was that any tradeable asset was only worth what someone would pay for it and, furthermore, that what they would pay you for it, in currency or assets, was in turn only worth what someone would then pay for that and so on.

In a very real sense therefore, if anything that can be bought or sold is only ever worth what someone would pay for it, and the same applies to anything that they would be using for payment, then any market is a construct of faith, faith that the things bought and sold in the markets have value, and faith that those markets will continue to exist, so that they will continue to have value.

This is the reason that a loss of faith, or confidence, in markets can be so damaging, and why they can tumble so fast in the absence of buyers. Market panics can start recessions, damage economies, make rich people poor and change the fate of nations.

Can faith move mountains? Well a lot of faith can supply enough labor and bulldozers to at least try to move them, and it is well demonstrated that through the placebo effect faith can heal the human body without medicine that would have any scientifically demonstrable effect.

Faith however if fragile. If you don't believe that a placebo medicine might heal you, it won't work, and if people lose faith in the power of the Fed to maintain asset prices, in the absence of anything else to keep them up, then they will fall. So how effective is this faith in the Fed likely to be here?

Well there are obvious limits to the power of faith in markets. I wrote a post on 16th May 2014 called The Great Brain Robbery reflecting (in the second half of the post) on the seemingly universal belief held at the end of 2013 that as QE3 ended, bond prices would fall in response. I had argued the opposite at the time, based on the pattern setup and the bond price history from the ends of QE1 and QE2, but I'm not certain I convinced anyone at the time that bonds might go up. The point was though that they did go up from there in a big rally, and the near universal belief that the opposite would happen didn't have any obvious impact at all.

Fast forward to the present and there is nothing like that general belief that equity markets will go up now. My post yesterday looking at the history of declines like we have seen so far this year over the 91 years of past price history on SPX tells us that there would usually be a backtest like the one we have seen into today, and then that the backtest would usually fail into lower lows. If that sample is restricted to the five examples I chose as directly comparable because they were the instances with serious economic shocks, then they all rallied back to this retracement level, and they all five then failed into lower lows. That's only a statistical sample of five, but that's a very strong indication of what would generally happen here.

It would be tempting here to compare the Fed to the story of King Canute trying and failing to command the tide, but that's not a good comparison as the movement of the tides depend on gravity, something not subject to the influence of any man, and the movement of the markets depends on faith/confidence, which is. We will see how that goes today. On to the markets.

On the monthly chart SPX has returned to backtest the monthly middle band, and is slightly above it at the time of writing. Of the 24 examples I was looking at in my post yesterday, eighteen failed without an obvious monthly close back above the monthly middle band, currently at 2892, and with the end of this month at the close tomorrow. Of the other six examples only two (of 24) managed to deliver a visually obvious monthly close back above the monthly middle band at the first test.

SPX monthly chart:
On the daily chart SPX has reached the 61.8% fib retracement of the decline and a strong daily RSI5/NYMO sell signal has fixed.

SPX daily chart:
On the hourly chart an RSI 14 sell signal is now brewing.

SPX hourly chart:
On the 15min chart the SPX rising wedge I showed in my post yesterday returned to test rising wedge support as I suggested then, and then returned to retest yesterday's high as I suggested then, and is now slightly overthrowing rising wedge resistance, which is something often seen at highs to signal that the high is being made. These wedges can break up, but break down 70% of the time or more.

SPX 15min chart:
This is the obvious candidate high area for this rally, the pattern and RSI signal setup for this rally support reversal here, and SPX past history also supports reversal here, with almost 90% confidence that the ultimate next target for that reversal would be a full reversal of this rally at minimum. We are waiting to see what the Fed have to say today but the odds favor down.

Stan and I will be doing our free monthly Chart Chat at theartofchart.net this coming Sunday 3rd May reviewing progress on SPX and the usual wide range of indices, bonds, currencies metals, energies and other commodities. If you'd like to attend you can register for that on our May Free Webinars page here.    

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Tuesday, 28 April 2020

An Overflow Of Good Converts To Bad

I have a Shakespeare theme with the title today, which is a quote from Richard III. I am a lifelong Shakespeare lover and have been using some of my quarantine time watching film versions of some of his plays, of which I have about thirty or so in total, many of which were beautifully done. Over the weekend I was watching The Tempest 2011 with Helen Mirren, Macbeth 2015 with Michael Fassbender, and Roman Polanski's Macbeth from 1971, controversially filmed just two years after the Manson Family tragically murdered Polanski's wife Sharon Tate and their unborn child.

All good films, though I do struggle with Shakespeare's great tragedies as I find the main protagonists very unsympathetic. Hamlet is forever looking for excuses not to act, King Lear brings ruin upon himself through his foolish actions at the start of the play but the strangest of all to my eyes is Macbeth.

Why is Macbeth so strange? Well the play starts with the victorious Macbeth being told by the witches that he would soon be the new Thane (Lord) Of Cawdor, which turns out to be true shortly afterwards, and further that he would later become King of Scotland. The mystery for me is that rather than think 'that's awesome' and just wait for that to happen in the normal course of events, Macbeth then murders the King, usurps the throne, and then rules as a tyrant until overthrown and killed not long afterwards by those he injured or mortally offended with his usurpation of the throne and subsequent tyranny. In modern terms one might compare this to him being reliably informed that he would win the lottery, then responding by fixing the lottery, winning it fraudulently, and then being prosecuted and jailed for his crime. Through his impatience he manages to snatch utter defeat from the jaws of otherwise seemingly inevitable victory. Stranger still, most of the many questions posed about Macbeth's motives in the play don't seem to involve asking why he's behaved like such an idiot. Weird.

Before I start I have a couple of things to say, and the first is to apologise for the length of this post. I did think about splitting this into two or three posts but didn't think that was practical. There is just a lot of information in this post. The second thing is that you may get the impression that I have complete contempt for the Fed and that isn't right. The Fed is staffed by highly intelligent and qualified people forced by the weight of past errors and poor leadership to take ever more insane measures to try to keep the economic show on the road. They have my sympathy and it is not a job I envy them. In terms of their predicament I described them a few years ago as being on the road to hell, a road that is wide, slopes downwards, and every so often has a signpost that states 'BECAUSE OF THE ACTIONS THAT YOU HAVE MADE IN THE PAST, YOU HAVE NO CHOICE BUT TO CONTINUE DOWN THIS ROAD'. They are effectively prisoners of circumstance here, with no obvious good options. The title of this post is referring to them, and their position is akin to that of Macbeth after he murders the King of Scotland to usurp his throne. From that point, equivalent here to the Fed allowing the dotcom boom to become a huge bubble, Macbeth's options steadily narrow to force him down the path to ultimate ruin. Looking at Macbeth I think of the Fed.

On to the markets. I'm mainly taking a long term view today as there's not much to add to my last post here, other than that the H&S scenario I was looking at there has evolved into a possible double top scenario instead. I will be looking at the short term setup in the last chart on this post.

I've been reading a lot in recent days about the many reasons that equity markets will break back up over this level, and that, having reached as high as this level (2900 area) on this rally, the benefit of the doubt is with the bulls as they have already come further than they would have done in a bear market.. Nothing could be further from the truth historically, and in this post I'll be showing you why this rally has come right up to the level one would expect it to reach, and show the historical statistics that strongly favor this rally failing in this area.

To do this I have prepared two log scale monthly charts on SPX that run back to when data starts in 1929 through to the present day, and have identified 24 occasions in the lifetime of SPX when after a significant bull run, SPX has broken back clearly below the SPX monthly middle band as we have seen it do this year. I would note that there were two borderline candidates, in early 1939 and early 1940 of which I excluded the 1939 example, which if included would have been a recovery back above the middle band before lower lows, raising the number of these from two to three on that chart, and from three to four overall.

The stats over the lifetime of the SPX for what came after the clear break below the monthly middle band were as follows:
  1. Clean backtest of the monthly middle band before lower lows: - 11 examples. 
  2. Sloppy backtest of the monthly middle band before lower lows: - 7 examples
  3. Recovery back over the middle band before lower lows: - 3 examples
  4. Recovery back over the middle band before higher highs (over preceding high) -3 examples
What can we take away from this data? Well the first point is that a backtest of the SPX monthly middle band soon after the clear break below is what you would usually expect to see. That level is at 2889 at the time of writing and the high on SPX so far today was marginally higher at 2921.15. None of those first eighteen clean or sloppy backtests of the monthly middle band delivered an obvious visual close back over the monthly middle band at the end of a monthly candle, so with this month ending at the close on Thursday, the obvious place to see this rally fail would be about here, and the obvious time would be about now. Most of these middle band backtests historically occurred the month after the break down.

So historically you'd expect to see this rally fail about here and about now about 75% of the time, and to result in lower lows before retesting the preceding high about 87.5% of the time. What about the others where the uptrend resumed? Well there were three of course, so about 12.5%, and these were all on the later chart, with the first in 1987, the second in 1994, and the third in 2018/9. Let's look at these.

The 1987 'crash' is being cited as a parallel for the current market decline and the key thing that I would note about that is that the backtest of the daily middle band came after about four months and then lasted a year, with the first significant break back above it at the end of 1988.

The decline in 1994 was a bit marginal and I wondered briefly whether it should be included, but SPX did trade under the monthly middle band for much of the year, even if the initial break below was marginal. After that initial break it was six months before there was a clear break back above the monthly middle band.

The decline and recovery in 2018 was the fastest, with a hard break below the monthly middle band in December 2018, a recovery slightly back above it in January 2019, and then holding as support at the lows in February, May and June 2019 before the last push up into the all time high at 3393.52 on 19th Feb this year.

So what does this data tell us that we should bear in mind here? The key takeaways for me are these:
  1. A decline comparable to the one we have seen this year has usually delivered a rally back to the monthly middle band and 75% of those failed there into lower lows. 
  2. Only four of these examples broke back above the monthly middle band within three months of the initial break (about 16.67%) and of those four, three failed into lower lows. 
  3. Of the three of these examples that resumed the uptrend, two spent at least several months testing the monthly middle band before breaking back up and only one managed higher highs within a year of the initial break down. 
So what would I also look at in this group? Well the economy has suffered a major shock, so I would pick out those comparable examples at the end of a major asset bubble such as 1929 and 2000, or with a major shock to the system, 1940 (WW2), 1972 (oil crisis), 2007 (financial crisis) as the more obviously comparable examples. Just looking at those five what do I see?
  1. All five of those delivered backtests of the monthly middle band that failed into lower lows and in all five of those instances the monthly middle band was not broken above on a monthly closing basis until the final low for that move had been made, and was only rarely backtested again on the way to that final low. 
  2. Only one of these examples delivered a break back above the monthly middle band within two years of the initial failed backtest and that was after the low in 2009, with that recovery back over the monthly middle band in Q4 2009, from the failed backtest in Q1 2008. 
Though this is a sample of only five previous comparable examples, four of the five delivered fast clean fails at this retest, with only the 1973 backtest being lengthy and involving some intra-month recoveries back over the monthly middle band. All then failed into new lows, with no retest of this area for years afterwards, as even after the 2009 low it was 2012 before the backtest and fail area from 2008 was retested. 

Here are those charts for everyone to look at and while some details might be arguable, I don't think that there's much overall room for reasonable dispute with my main conclusions, though I will be looking at what obviously is different this time in the next section. 

SPX monthly log scale chart 1925-75: 
SPX monthly log scale 1974-present: 
So what is different this time? Well firstly the Fed is dramatically different this time, and that's what I'll be looking at next. 

Here is my image choice for my look at the Fed today, and if you're wondering why I chose it, just read on. If you're enjoying some of the great demotivational posters that I've been using in a lot of my recent posts, and on and off for much of the last decade, check out the author website at despair.com for some good laughs and amusing gift ideas. 
Historically the role of the central banker was always pretty clear. Ben Franklin, in another context once said that 'an ounce of prevention is worth a pound of cure', and the key role of the central banker historically was to deliver that ounce of prevention. A good central banker tried to smooth the economic cycles, adding some liquidity when growth was sluggish and taking some away when growth started running away. The classic descriptions for me of the job of the central banker by a central banker are from William McChesney Martin (Fed Chair 1951-70) and they described the model central bank aiming to 'lean against the wind' or 'take away the punchbowl just as the party starts to really get going'. The job was about keeping economies on an even keel, managing them through financial panics, and ignoring short-termist politicians, which is why over time central bankers in major economies were made independent of politicians so that they could do their boring but important work with longer time horizons than those allowed by elections.

So what happened to the Fed? Well Greenspan set the ball rolling with a mix of awe-inspiringly bad forecasting skills, arrogant hubris, and a need to be loved, when he let the dotcom bubble happen, as bubbles are fun and party poopers are rarely popular. If you think I'm being harsh about his forecasting skills dig up a transcript of his confirmation hearing from 1987 and his hilarious grilling by Senator Proxmire then, after which Proxmire concluded that he (Proxmire) could at least take some comfort in the thought that Greenspan's past forecasting record was so bad that it was hard to imagine him doing any worse in the future. In the Dotcom Bubble Greenspan ascribed much of the bubble to improvements in productivity and kept cutting interest rates until shortly before the bubble burst. Those productivity gains turned out to be largely illusory but the bubble's aftermath was not.
After the dotcom bubble burst, undeterred by previous incompetent failure, Greenspan's Fed applied a pound of cure to try to fix the aftermath, cutting interest rates hard and letting a property bubble form that then exploded in 2008.  By this point Bernanke was Fed Chairman and was initially cautious in response until the failure of Lehman Brothers, at which point it seemed that the entire banking system was at risk of failure. The next pound of cure applied in the wake of that failure has defined the Fed that we have inherited today.

The Fed we have now is unlike any that we have seen historically. Prevention and caution are things of the past, leaning against the wind is a memory and, far from taking away the punchbowl just as the party is getting going, the Fed is forever now adding more punch in the fear that if the party should ever stop, then the aftermath could be so bad that the pound of cure required to fix it might be beyond their power to deliver. The Fed has promised to do whatever it takes to fix this crisis and has already committed many trillions of newly created money to doing so. This is new, and not comparable to anything that any previous central bank has tried to do in any previous crisis. Does this look crazy and desperate by historical standards? Yes. Is there a reason for that? Yes, and that brings me to the second main thing that is very different going into the current crisis. Debt.
The chart above is a couple of years old and debt is a huge worldwide issue much larger than the issue in the US, but the chart above is a representation of the growth of public and private debt in the US over recent decades. Note that the doveish Greenspan replaced the hawkish Volcker as Fed Chairman early on in 1987, and note the small pause in the increase in private debt during the financial crisis 2008/9. The Fed has been trying to keep the economy on the road for decades now with ever lower interest rates and easier money, and during that time, and in response to these conditions, public and private debt has been growing ever higher to levels that really have no historical precedent.

Historically increasing levels of debt tend to depress growth and increase inequality, and obviously we've been seeing that deliver in recent decades, and of course there is also an obligation for that debt to be serviced and, in theory ultimately, to be repaid. What happens in the event that a highly leveraged economy receives an economic shock that makes it hard to service that debt? Well the expectation would be that a significant amount of that debt could not be serviced or repaid, and worst case much of that debt might default. Given the huge level of this debt and the way it is layered through the economy and the financial system, that could precipitate an economic crisis on a scale that might risk a second Great Depression which is an outcome, more than anything else, it is the Fed's highest economic priority to prevent.

Overall the Fed has been lurching from crisis to crisis for decades now, their original brief as economic watchdog is long forgotten and their time seems mainly to be split between adding floors to a skyscraper of debt in the world economy, and trying to catch the chunks of debris falling from that unstable edifice that gets ever less stable the higher it climbs. The Fed looks ready to take any measures, however deranged, to try to prop everything up into an approximation of economic health in the hope that if they can do so for long enough, something will turn up that makes everything turn out ok. Who knows? That might even happen.

Right here and now though what's the bottom line? Historically the odds of a failure here on SPX into lower lows are very high, and the chances that whatever happens here will deliver new bear market lows before a retest of the all time high on SPX are close to 90%. Short term that failure would usually happen about here, and about now.

Against that weight of historical precedent stands the Fed, in a stance and wielding historical weapons that are without historical precedent, and ready to act in a way that most past Fed chairman, possibly including even Alan Greenspan, would view as wildly reckless. Can they prop up the markets a bit longer? Maybe. We'll have to see.

Regardless though, a direct resumption of the uptrend coming into 2020 looks both hard to deliver and unlikely to last long, but if SPX should close April much over 2900 on Thursday, that would open a possible higher range 2900-3100 over coming months until the next leg down would then most likely start anyway in the summer. We will see how this develops, and of course nothing is ever certain until it has happened.

Back to the short term, where the SPX high this morning has finally established a really good resistance trendline, and this is now a very good candidate for the rally rising wedge. Ideally SPX would next retest or modestly break rising wedge support, currently in the 2840-5 area, then retest the rally highs tomorrow into FOMC and make a marginal higher high that respected the 61.8% retracement area 2930-5, then fail to start the next leg down for this bear market. I'd also like to see rally high retests on NQ and ESTX50 to complete an ideal overall topping setup.

SPX 15min chart:
I don't know yet whether Stan and I will be doing our free monthly Chart Chat at theartofchart.net this coming Sunday or the following one. Whenever we are doing that, we'll be reviewing progress on SPX and the usual wide range of indices, bonds, currencies metals, energies and other commodities. I'll be tweeting out more details on my twitter as I get them. I'm hoping to get another (much shorter) post out this week on Thursday or Friday looking at the action on SPX between now and then.

UPDATE: The next free public Chart Chat at theartofchart.net is on Sunday 3rd May and you can register for that on our May Free Webinars page here