Another action packed week in the books. The USA topped the leaderboard with the most cases on Friday and a 2$ trillion stimulus package has been approved by congress. This week we had a sharp retracement from the lows with a nearly 18% bounce from the lows to the highs, the sharpest in fact since 1933. It seems as though the things are looking hopefully and we should all just buy this dip... right? To be blunt, I have no idea where this market is heading at the moment, however I can tell you for sure we are at an important inflection point and caution should be taken.
For context, the recent decline since February has been the steepest in history, quite literally. We went from highs to down 35% in just 23 trading days. In comparison, a 35% drop during the Financial Crisis took nearly 5 months. Now that been said, what do you think follows the steepest decline in history? Well, just like Newton's Third Law of Motion, we would expect an equally impressive bounce; and this is exactly the price action we saw. However this is just that, a bounce; this does not mean the bear market is done. We could easily come back to the lows and continue the longer term downtrend. This is why we are at an important inflection point.
First lets look at SPY. Friday, following a gap down, SPY trended back up to resistance at 260 and rejected it was a big selloff in the last hour of trading. Notice price also rejected the top of the HVN. The short term uptrend seems to be terminated which would make sense after such an extended and steep bounce. For a bullish case, I would want to see SPY retest and reject the 248 area where support and the 5DMA align. 260 is definitely the area to watch for a breakout. If SPY looks like it's about to break above this important resistance, I plan to start loading up on longs. Otherwise, we may either trend sideways or retest lows.
Next, QQQ is looking seriously weak. QQQ underperformed compared to the other indexes and the "bounce" does not seem like much on the 30m timeframe. QQQ is currently rejecting the falling 20DMA which is not a good sign for a bullish case. QQQ looks like it's heading back to the 5DMA for a retest similar to SPY. The 20DMA is the area to watch for a breakout for a bullish case.
Despite the big bounce in the indexes, we have not seen VIX fall off a cliff yet as we would expect. This might be a signal that the bloodbath is not over yet. VIX is currently trading sideways and consolidating right under the 20DMA. It seems a breakout might be imminent.
Overall, despite all the good news and bullish price action lately, I would not start getting long here. We are in an overextended bounce and the short term and intermediate term trend is neutral. However watch the price action closely this week as we will definitely get some clues as to where this market is going.
For context, the recent decline since February has been the steepest in history, quite literally. We went from highs to down 35% in just 23 trading days. In comparison, a 35% drop during the Financial Crisis took nearly 5 months. Now that been said, what do you think follows the steepest decline in history? Well, just like Newton's Third Law of Motion, we would expect an equally impressive bounce; and this is exactly the price action we saw. However this is just that, a bounce; this does not mean the bear market is done. We could easily come back to the lows and continue the longer term downtrend. This is why we are at an important inflection point.
First lets look at SPY. Friday, following a gap down, SPY trended back up to resistance at 260 and rejected it was a big selloff in the last hour of trading. Notice price also rejected the top of the HVN. The short term uptrend seems to be terminated which would make sense after such an extended and steep bounce. For a bullish case, I would want to see SPY retest and reject the 248 area where support and the 5DMA align. 260 is definitely the area to watch for a breakout. If SPY looks like it's about to break above this important resistance, I plan to start loading up on longs. Otherwise, we may either trend sideways or retest lows.
Next, QQQ is looking seriously weak. QQQ underperformed compared to the other indexes and the "bounce" does not seem like much on the 30m timeframe. QQQ is currently rejecting the falling 20DMA which is not a good sign for a bullish case. QQQ looks like it's heading back to the 5DMA for a retest similar to SPY. The 20DMA is the area to watch for a breakout for a bullish case.
Despite the big bounce in the indexes, we have not seen VIX fall off a cliff yet as we would expect. This might be a signal that the bloodbath is not over yet. VIX is currently trading sideways and consolidating right under the 20DMA. It seems a breakout might be imminent.
Overall, despite all the good news and bullish price action lately, I would not start getting long here. We are in an overextended bounce and the short term and intermediate term trend is neutral. However watch the price action closely this week as we will definitely get some clues as to where this market is going.