The current situation on the SP500 is at least, confusing, how is it possible that the SP500 has bounced nearly 30% from March 2020 lows given the current situation (pandemic, terrible macro data, fear and pessimism, etc). In this post I'll share my views about what this "non-sense" might be telling us...
As you see in the chart, technically speaking, the current set up is very similar to that in 2001. We have huge bearish divergences between Price action and RSI oscillator. Keep in mind, that this is just technically speaking, as current macro situation is completely different.
So first thing you may notice is that these huge bearish divergences lasted almost five years (1996-2001) in the previous crisis, and the bear market only began once Price tested 12 month moving average and could not break higher (red circle), but previous drops did not signal the start of a bear market as Price moved higher tan the MA.
Currently we have a similar set-up in April 2020, huge divergences between Price and RSI, and Price approaching MA. Should Price go higher than the MA, bull market could continue at least until November 2020 (US presidential elections). If Price cannot break above the MA, then bear market is definitely confirmed.
Target Price for bull market would be (approx) 3600 (Nov 2020).
Target Price for bear market would be (approx) 1500 (Nov 2020).
So now the question is, which one is more probable? Well, you have to keep in mind that currently there are two forces fighting:
Who will win this fight reminds me the part of Avengers movie, when Loki says "I have an army" and Tony Stark says "I have a Hulk". Well in this case reality would say "I have a pandemic" and Fed would say "I have a printer". I favor therefore the bullish scenario because FED will do anything necessary to pump the markets higher. They will buy stocks if necessary and destroy the purchasing power of the dollar without hesitation.
This does not mean that we will not have volatility (retesting MA several times), I think we will see a lot. I would not position myself heavily anyway for any of this scenarios until we see a test of MA. Of course, that test should happen in the next two weeks, otherwise, the thesis should be reassessed.
So even if market sentiment seems negative (most articles in Tradingview are bearish), this does not mean that market can stay irrational longer than you think (look at 1996-2001), as Kostolany said: "If weak hands hold stocks, any positive news has little effect on prices, but any negative news will make them go down deeply. If strong hands hold stocks, any positive news will make stocks go higher, and any negative news will have little effect on prices." This is what is happening right now, so ask yourself who is buying stocks (short squeezes apart).
To conclude, I think one should stay as agnostic as possible, leaving feelings and what we want, or what "should" happen aside. Logic and macro tells us we are in bear market, but technicals do not confirm this yet.
Feedback more than welcome.
As you see in the chart, technically speaking, the current set up is very similar to that in 2001. We have huge bearish divergences between Price action and RSI oscillator. Keep in mind, that this is just technically speaking, as current macro situation is completely different.
So first thing you may notice is that these huge bearish divergences lasted almost five years (1996-2001) in the previous crisis, and the bear market only began once Price tested 12 month moving average and could not break higher (red circle), but previous drops did not signal the start of a bear market as Price moved higher tan the MA.
Currently we have a similar set-up in April 2020, huge divergences between Price and RSI, and Price approaching MA. Should Price go higher than the MA, bull market could continue at least until November 2020 (US presidential elections). If Price cannot break above the MA, then bear market is definitely confirmed.
Target Price for bull market would be (approx) 3600 (Nov 2020).
Target Price for bear market would be (approx) 1500 (Nov 2020).
So now the question is, which one is more probable? Well, you have to keep in mind that currently there are two forces fighting:
- Reality: pandemic + negative consumer sentiment (deflationary)
- FED + Us Gov: printing like there is no tomorrow + bailout everybody (inflationary)
Who will win this fight reminds me the part of Avengers movie, when Loki says "I have an army" and Tony Stark says "I have a Hulk". Well in this case reality would say "I have a pandemic" and Fed would say "I have a printer". I favor therefore the bullish scenario because FED will do anything necessary to pump the markets higher. They will buy stocks if necessary and destroy the purchasing power of the dollar without hesitation.
This does not mean that we will not have volatility (retesting MA several times), I think we will see a lot. I would not position myself heavily anyway for any of this scenarios until we see a test of MA. Of course, that test should happen in the next two weeks, otherwise, the thesis should be reassessed.
So even if market sentiment seems negative (most articles in Tradingview are bearish), this does not mean that market can stay irrational longer than you think (look at 1996-2001), as Kostolany said: "If weak hands hold stocks, any positive news has little effect on prices, but any negative news will make them go down deeply. If strong hands hold stocks, any positive news will make stocks go higher, and any negative news will have little effect on prices." This is what is happening right now, so ask yourself who is buying stocks (short squeezes apart).
To conclude, I think one should stay as agnostic as possible, leaving feelings and what we want, or what "should" happen aside. Logic and macro tells us we are in bear market, but technicals do not confirm this yet.
Feedback more than welcome.
Comment:
Sp testing 200 SMA, we’ll see in the next few days wether the bull market is confirmed, or if this is just a bear market rally. This week sentiment will remain positive on earnings and news about countries re-opening, later in mid may, a correction is quite probable as oil prices should collapse again.