Sunday, May 3, 2020
Broader Market Review
It looks like we might be in the expected second dip phase I described last week. The Dow has rolled over about 1,000 points from my forecast zone and is in a precarious position as are the S&P 500 and Nasdaq.
The rollover reversal last week aligned with the 50% retracement level in the Dow and S&P 500 and the 75% retracement level in Nasdaq. All three indexes are now aligned exactly at the lower band of their well defined ascending channels created off the March 23rd lows. When all three are aligned like this it creates a tension in the market that usually leads to heightened volatility in either direction.
While we can continue to trade higher inside these steep, unsustainable channels it makes more sense to get a deeper rollover now. We have come a long way fast, we are right back to neutral value and to clear the decks for continued expansion we want to see some consolidation between Dow 22,000 and 27,000 to help repair the technical damage and build a strong foundation for higher prices.
My current forecast is short term caution with sideways chop through summer and a rip higher following the election. I don’t think we will revisit the March 23rd lows any time soon.
I would look to the green support lines as long term entry zones on the following Dow, S&P 500 and Nasdaq ETF charts.
SPDR Dow Jones Industrial Average ETF (DIA)
SPDR’s S&P 500 Trust Series ETF (SPY)
Invesco QQQTrust Ser 1 (QQQ)
It’s important to understand the value of knowing support and resistance levels and the influence they have on world markets. These levels are not only where short term reversals occur but where long term expansions and contractions begin. Not knowing or understanding these levels would be like trying to hitchhike without a thumb.. not the greatest analogy but I thought it was funny.
On March 24th, the day after the Corona bottom, I wrote..
“This presents us with long term asymmetrical risk/reward opportunities. When price defaults to these long term levels you can bet big buyers are paying attention and beginning to incrementally step in. There is a clear defined risk under such critical support and unlimited reward above. Low risk/high reward entries are always associated with price trading down into these important inflective price levels.”
Well, that’s exactly what happened, the broader market surged higher. The short term returns on the 25 stocks and ETF’s I have highlighted since that day have been similar to what you might expect from multi year returns. Congratulate yourself, take some profits and create some more dry powder to do it again.
Going forward, current data suggests the broader market could remain in a wide trading range for months. If you are an active trader this should provide multiple opportunities for swing trading throughout the summer. If you are more passive I would look for entry points along the green line primary support levels on the DIA, SPY and QQQ charts for longer term holding periods.
I would avoid energy and overweight technology. While energy might experience some short term rallies I think it will continue to be a value trap for many years. Technology, on the other hand, has outperformed during both the Corona Crash and recovery. Many tech stocks are near or have made all time highs in the weeks following peak fear while the Dow is still 20% from its high prior to the Corona Crash.
In addition, there are a handful of companies outside the tech sector that are high on my “want to own” list and they appear to be positioning for a robust expansion. Once they drift down into their reversal zone and align with a broader market reversal they should begin to channel higher.
We are entering a period of time with limited visibility. Earnings guidance is either non existent or murky. It will be more difficult in the months ahead to make investment choices if you rely on fundamental analysis. Now may be the time to consider the value of using a more technical approach. Now may be a good time to become familiar with the type of technical approach I use. You will not find this type of analysis at your local brokerage firm or traditional research or investment company. It is not taught in any market technician schools or finance courses and your financial advisor does not understand the deep fractal analysis I use to result in an accuracy that is hard to argue with.
Results are what matter. Results over many years that are consistent are what matter. Consistent profitable entries and exits are what matter. Consistent broader market forecasts are what matter. Proof over many years is what matters. Archived performance, forecasts and results are available here.
If you would like more information or have any questions please don’t hesitate to reach out.