Very Important Analysis on Possible Future of Stocks. Read All!
Here, we're looking at the S&P500 weekly futures chart. Before we get into the analysis, I would like to say that I think there is probably 90-95% chance that the stock market has topped out. I say that because the formations on the chart suggest that the top is in for the stock market, and that isn't anything that was unexpected. I mean, if we simply take duration into account, and consider the fact that this is the longest bull market in history, it's no surprise that a final top has likely been formed. Furthermore, when we look at the extreme volatility that the market has produced, it increases the likelihood that this could be a major long-term top in the market.
With that said, a short-term bottom could be forming at the moment, but if we do see a short-term bottom here, I don't expect that the all time high would be challenged. There area a few reasons why I think we could see a short-term bottom around here. First off, the weekly RSI is deep in oversold territory. If you look at each time the RSI has dropped below the grey range (bottom graph on the chart) you can see that those troughs (shown with green circles) have corresponded to both short and long-term bottoms in the market. So, just based on the fact that we are very oversold on the weekly chart, I think we could see a bounce soon.
Furthermore, when we look at where price is, we can see that it is testing the 38.2% Fibonacci retracement level. So, we are currently testing a common retracement level that COULD*** act as support.
Now, we have to look at the big topping formation here, to try to understand what it could do. From my perspective, it looks like we have formed a big POSSIBLE*** left shoulder, a possible head (which includes the all-time high) and I see the potential, that we could form a right shoulder here, to complete a big head and shoulders pattern on this chart. Now, there currently is no evidence that we will form a right shoulder here, other than the fact that we are oversold, and testing a known support level, which is the 38.2% retrace and the major low from December 2018.
So, I do think there is a good chance that the market could rally short-term, to form the right shoulder of a bearish head and shoulders pattern. Further increasing the likelihood of a rally from here, we can look at the action around the 200 week moving average (shown in purple on the chart.) You can see that price has broken down extremely hard below the 200 week. Historically, that has corresponded to the beginning of a bear market/recession. In fact, if we look at what happened after the top of the dot com bubble, and the top of the great recession, we can see that price fell below the 200 week moving average, and then rallied back up to it, confirming it as resistance (purple circles) before ultimately heading substantially lower. Look back at the current topping pattern, we can see that if a similar move happened, it would cause price to rally up to the 200 week, and then fall, printing our anticipated right shoulder.
What I want to point out (and this is admittedly speculative) is that we could even be forming a much larger head and shoulders formation. You can see that in 2015, the market formed a peak (LS) that could be the left shoulder of a much larger head and shoulders formation. Then, you can see that we may be in the process of forming a massive head (H). If we look at where the 61.8% retracement is for the entire bull market, we can see that it is right around 1715. If price retraces to the 61.8 level (which is practically guaranteed in a recession) it is likely to act as major initial support for the market. I have indicated this with the hypothetical arrows showing how a meltdown could occur. You can see that, assuming the 61.8% level acts as initial support (which is highly likely) we could see the development of the right shoulder of this incredibly large (yet currently hypothetical) head and shoulders pattern.
Here's where things get interesting. For those who don't know, head and shoulders patterns are bearish formations. Generally, you subtract the height of the head from the breakdown point of the neckline to find a price target. The extremely thick red line on the chart is where our very hypothetical neckline could be, for a larger head and shoulders pattern.
When we look at the top of the last recession, we can see that retraced to a level even deeper than the beginning of the bull market that ensued after the end of the dot com bubble. In other words, the great recession corrected more than 100% of the bull market that lead into it. You can see that on the bottom of the chart, there is a falling blue trendline. That trendline connects the lows of the dot com bubble and the great recession, and then extends to the right. I find this really interesting, because if we do see the development of a massive head and shoulders formation on this chart, it could produce a breakdown that is again more than 100% of the bull market that lead into the all-time high. So, I don't think it would be impossible to see the stock market correct more than 100% of the bull market, eventually crashing down to the falling blue trendline.
Admittedly, there are a lot of hypotheticals in this analysis, but I think this could be a potential road map of how the market could develop. I like to make these every now and then, and then watch how they develop over time. If the market deviates greatly from the projected "road map" I can reassess the analysis from there.
Now, I'll comment on the fundamentals that could cause such an epic meltdown. It all boils down to debt. We have an extreme, unsustainable debt crisis looming in the background of the entire global economy. It is out of control, and completely unsustainable. I say that because there is CLEARLY no exit strategy, or a feasible plan to unwind the global debt crisis. I just looked up the numbers this morning, and the US government has nearly $23.5 trillion in debt. However, the total debt of the US and it's citizens is far worse. The "unfunded liabilities" debt (which includes mortgages, credit cards, student loans, interest, personal debt, trade debt, social security debt, and medicare debt) is a whopping $128.64 trillion!
The national (government) debts of other countries around the world is really bad too. Nearly every country in the world is running on excessive debts...
China debt $8.6 trillion.
Japan debt $11.4 trillion.
Germany debt $2.37 trillion.
UK debt $3.35 trillion.
France debt $2.85 trillion.
India debt $2.53 trillion.
Italy debt $2.87 trillion.
Brazil debt $1.8 trillion.
Canada debt $1.7 trillion.
The list goes on and on. Nearly every country in the world is running a major deficit, with many countries at far more than 100% of GDP. Some, like Ireland, are at more than 1,000% GDP. Also, those figures are only the NATIONAL DEBTs of those respective countries. If we considered the "unfunded liabilities" of those countries as well, we would likely see that the numbers skyrocket ten times or more.
All it would take, in my opinion, is for Federal Reserve banks around the world to lose control of interest rates. We've already seen examples of that in the overnight repo market in the US, when last year the interest rates suddenly climbed from some two percent to ten percent in a matter of minutes. The US Federal Reserve quickly responded by dumping roughly $800 billion into the credit markets. However, just the other day, they announced that they would again begin injecting $1 to $1.5 trillion more dollars in to the repeatedly failing credit market. So, if we lose control of rates, the interest on a lot of debt in the world could suddenly be exposed to substantially higher rates, which would cause debt figures to explode to something that is literally impossible to pay.
In summary, the coronavirus is a true "black swan" event, which is undoubtedly casting the global economy into a recession. Central banks and governments are scrambling to inject money into the system, but we could find tha the market no longer responds to capital injections, especially if the debt crisis roars out of control. If that happens, we could see the S&P fall to the $500 range, as this analysis suggests.
I'm The Master of The Charts, The Professor, The Legend, The King, and I go by the name of Magic! Au revoir.
***This information is not a recommendation to buy or sell. It is to be used for educational purposes only.***
-JD-
With that said, a short-term bottom could be forming at the moment, but if we do see a short-term bottom here, I don't expect that the all time high would be challenged. There area a few reasons why I think we could see a short-term bottom around here. First off, the weekly RSI is deep in oversold territory. If you look at each time the RSI has dropped below the grey range (bottom graph on the chart) you can see that those troughs (shown with green circles) have corresponded to both short and long-term bottoms in the market. So, just based on the fact that we are very oversold on the weekly chart, I think we could see a bounce soon.
Furthermore, when we look at where price is, we can see that it is testing the 38.2% Fibonacci retracement level. So, we are currently testing a common retracement level that COULD*** act as support.
Now, we have to look at the big topping formation here, to try to understand what it could do. From my perspective, it looks like we have formed a big POSSIBLE*** left shoulder, a possible head (which includes the all-time high) and I see the potential, that we could form a right shoulder here, to complete a big head and shoulders pattern on this chart. Now, there currently is no evidence that we will form a right shoulder here, other than the fact that we are oversold, and testing a known support level, which is the 38.2% retrace and the major low from December 2018.
So, I do think there is a good chance that the market could rally short-term, to form the right shoulder of a bearish head and shoulders pattern. Further increasing the likelihood of a rally from here, we can look at the action around the 200 week moving average (shown in purple on the chart.) You can see that price has broken down extremely hard below the 200 week. Historically, that has corresponded to the beginning of a bear market/recession. In fact, if we look at what happened after the top of the dot com bubble, and the top of the great recession, we can see that price fell below the 200 week moving average, and then rallied back up to it, confirming it as resistance (purple circles) before ultimately heading substantially lower. Look back at the current topping pattern, we can see that if a similar move happened, it would cause price to rally up to the 200 week, and then fall, printing our anticipated right shoulder.
What I want to point out (and this is admittedly speculative) is that we could even be forming a much larger head and shoulders formation. You can see that in 2015, the market formed a peak (LS) that could be the left shoulder of a much larger head and shoulders formation. Then, you can see that we may be in the process of forming a massive head (H). If we look at where the 61.8% retracement is for the entire bull market, we can see that it is right around 1715. If price retraces to the 61.8 level (which is practically guaranteed in a recession) it is likely to act as major initial support for the market. I have indicated this with the hypothetical arrows showing how a meltdown could occur. You can see that, assuming the 61.8% level acts as initial support (which is highly likely) we could see the development of the right shoulder of this incredibly large (yet currently hypothetical) head and shoulders pattern.
Here's where things get interesting. For those who don't know, head and shoulders patterns are bearish formations. Generally, you subtract the height of the head from the breakdown point of the neckline to find a price target. The extremely thick red line on the chart is where our very hypothetical neckline could be, for a larger head and shoulders pattern.
When we look at the top of the last recession, we can see that retraced to a level even deeper than the beginning of the bull market that ensued after the end of the dot com bubble. In other words, the great recession corrected more than 100% of the bull market that lead into it. You can see that on the bottom of the chart, there is a falling blue trendline. That trendline connects the lows of the dot com bubble and the great recession, and then extends to the right. I find this really interesting, because if we do see the development of a massive head and shoulders formation on this chart, it could produce a breakdown that is again more than 100% of the bull market that lead into the all-time high. So, I don't think it would be impossible to see the stock market correct more than 100% of the bull market, eventually crashing down to the falling blue trendline.
Admittedly, there are a lot of hypotheticals in this analysis, but I think this could be a potential road map of how the market could develop. I like to make these every now and then, and then watch how they develop over time. If the market deviates greatly from the projected "road map" I can reassess the analysis from there.
Now, I'll comment on the fundamentals that could cause such an epic meltdown. It all boils down to debt. We have an extreme, unsustainable debt crisis looming in the background of the entire global economy. It is out of control, and completely unsustainable. I say that because there is CLEARLY no exit strategy, or a feasible plan to unwind the global debt crisis. I just looked up the numbers this morning, and the US government has nearly $23.5 trillion in debt. However, the total debt of the US and it's citizens is far worse. The "unfunded liabilities" debt (which includes mortgages, credit cards, student loans, interest, personal debt, trade debt, social security debt, and medicare debt) is a whopping $128.64 trillion!
The national (government) debts of other countries around the world is really bad too. Nearly every country in the world is running on excessive debts...
China debt $8.6 trillion.
Japan debt $11.4 trillion.
Germany debt $2.37 trillion.
UK debt $3.35 trillion.
France debt $2.85 trillion.
India debt $2.53 trillion.
Italy debt $2.87 trillion.
Brazil debt $1.8 trillion.
Canada debt $1.7 trillion.
The list goes on and on. Nearly every country in the world is running a major deficit, with many countries at far more than 100% of GDP. Some, like Ireland, are at more than 1,000% GDP. Also, those figures are only the NATIONAL DEBTs of those respective countries. If we considered the "unfunded liabilities" of those countries as well, we would likely see that the numbers skyrocket ten times or more.
All it would take, in my opinion, is for Federal Reserve banks around the world to lose control of interest rates. We've already seen examples of that in the overnight repo market in the US, when last year the interest rates suddenly climbed from some two percent to ten percent in a matter of minutes. The US Federal Reserve quickly responded by dumping roughly $800 billion into the credit markets. However, just the other day, they announced that they would again begin injecting $1 to $1.5 trillion more dollars in to the repeatedly failing credit market. So, if we lose control of rates, the interest on a lot of debt in the world could suddenly be exposed to substantially higher rates, which would cause debt figures to explode to something that is literally impossible to pay.
In summary, the coronavirus is a true "black swan" event, which is undoubtedly casting the global economy into a recession. Central banks and governments are scrambling to inject money into the system, but we could find tha the market no longer responds to capital injections, especially if the debt crisis roars out of control. If that happens, we could see the S&P fall to the $500 range, as this analysis suggests.
I'm The Master of The Charts, The Professor, The Legend, The King, and I go by the name of Magic! Au revoir.
***This information is not a recommendation to buy or sell. It is to be used for educational purposes only.***
-JD-
Comment:
Correction: Ireland's debt/GDP ratio is 902%. However, with the unfunded liabilities factored in, it would be well over 1,000%.