It's unwise to make any predictions in this current market, but we can draw some possible scenarios and later, amid the smouldering wreckage of the economy, see how we did. I've charted the SPY ETF because I'm trading it, but actually you can compare the charts of all major indices and they have followed the same pattern, because the drivers have been common: general overheating followed by the coronavirus shock.
Indicators used: TradingView built-in EMAs (21, 55) and Moving Average (200), the Fibonacci Retracement tool, and my own, free "Price Action Channel Trend Overlay | Simple" (you could substitute Heiken Ashi or any other trend tool).
The daily chart shows the brutal move down, and an equally violent bounce, which got rejected from (even slightly before) the 21D EMA. The rally hit and exceeded the 0.382 retrace, so technically, this is enough to count as a correction and for the downtrend to continue.
Option 1 says this rally is done, more traders will short the rally than buy the dip, and we are headed lower. Fundamentally, we might take this path if: + We get bad news about testing revealing that there have been less asymptomatic infections than previously thought, therefore there is less immunity around, and the scale of the virus problem is larger. + There is no more action from the FED and central banks, or the market judges it ineffective. Technically, if the daily trend turns bearish, we'll probably-definitely go this route. I would also not like to close below the daily 0.236 retrace of the big move down, OR the 0.5 retrace of the bounce up (shown on the 4H chart).
Option 2 says that after such a huge move down, we should get a more substantial retrace to at least 50%. My target box is a 0.5-0.618 retracement. It's hard for me to find support/resistance in this kind of pattern, but arguably there is a zone that was tested from both sides at the 0.5 around 272. Depending how long it takes, we could also see the 0.5 being confluence with the dropping 55D EMA. We've had 8 trading days in more or less the same (albeit large) range of 243-263. So far this is consolidation. Fundamental triggers for this consolidation breaking up: + We might get some good news about new viral cases slowing in a major country, or progress on new treatments. Or more accurately, the market might choose to react to such news. Technical: + We're still above the 0.236 retrace line. + The 4H trend is still green while the daily is indecisive. If the 4H and 1D trends stay neutral and turn bullish, this option is, for me, the most likely.
Option 3 would be the more bullish 0.618 retest, perhaps in confluence with the daily AND 4H 200s by that time. If we get Option 2, price action at the 55D EMA should tell us if it will go further.
Option 4 says that no matter which imaginary line we retrace to, we are going on a long, slow ride down from there. Fundamentally: + The long-term economic indicators are all terrible + Free money, while it *could* cause an irrational crack up, seems to be having less and less of an effect. + Fiscal stimulus won't fix unemployment, and might only delay corporate defaults and consumer defaults. + Any hint of a real liquidity crisis could trigger this scenario. Technically, we are now in a confirmed bear market, and my bias is short until proven otherwise.
Option 5 would be the proof otherwise. Fundamentally, the only thing I could see lifting us back to previous highs would be either very quick progress on a virus treatment/cure, or (or more likely, and) *even more* free money, in unpronouncable amounts. Technically, we would have to break above the daily 200s, retest, and hold there for this to become real.
For the record, I *want* the economy to do well, no-one to get sick, and everyone's pensions to be full. But I'm planning for the opposite.
Update: Target box exceeded by less than 1%. Double top-looking rejection from 200 MAs. Lost 21D EMA on close.
Option 4 next.
SimpleCryptoLife
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Also, check out the volume: it's way smaller for the move up than it was for the move down, and it's declining. Another signal of weakness for me.
SimpleCryptoLife
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Update:
I made an error in my original chart: it was in log scale, which I'm used to for the wildly volatile crypto market, but which isn't so usual for equities. If you draw the Fib retracement in regular scale, we've come into my target box a little better. This rally has gone a shade higher than I expected. However, it's now running into the 200 SMA/EMA zone on both daily and 4H charts. A proper rejection here would be very logical and a good signal.
If you see this rally as an impulsive 1-5 move after an ABC correction, we made a nice retracement on leg 2, but got a weak leg 3, just about to 1.0 extension. You could expect, then, that leg 5 would fail to get to 1.0.
So we could see 315 as the upper bound (the 1.0 extension and also previous high on the way down). It shouldn't get above there.
However, we all know this is being fuelled by free money. So while technically I think the rally is now out of steam, they *could* still money-print their way higher.
On balance, though, I expect some bearish fundamentals to appear to fulfill the bearish technicals.
Enzonium
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Which one do you think is most probable? To me I think option 2, maybe 3, then definitely 4. I think doing a strangle strategy would be beneficial whichever way the price moves. What do you think?
SimpleCryptoLife
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@Enzonium, I agree with you about the order of probability. Honestly, I usually trade crypto and was only forced to look at equities and commodities now because of world events. I wanted to apply some basic technical analysis here because it really seems like a historic juncture. But I don't use options so I can't say anything about an options strategy. I'm simply waiting for a good short entry ;-)
Forgot to add the obligatory "I'm not an expert, this isn't advice" schtick to my analysis.
Option 4 next.