SHORT-TERM STOCK REBOUND CONTINUES -- S&P 500 REGAINS 200-DAY LINE -- UPSIDE RESISTANCE LEVELS TO WATCH -- VIX FALLS BACK BELOW 40 -- TREASURY BOND ISHARES LOOK OVERBOUGHT
SHORT-TERM STOCK REBOUND CONTINUES... Extremely oversold readings on daily charts at the end of last week, combined with chart support near the October low, increased odds for a rebound in stocks this week. Stocks are rebounding today after yesterday's selloff. And are building on gains that started on Friday afternoon and again on Monday. The daily bars in Chart 1 show the S&P 500 trading back over its 200-day line this afternoon. A decisive close back over that long-term support line would be encouraging. Its 14-day RSI line in the upper box is back above 30, but may run into resistance near the 50 level. Its daily MACD lines (lower box) remain negative, but the spread between the two lines is narrowing. The bigger question is how far that rebound can carry and what happens after that. Chart 1 deals with the first part of that question and shows some potential overhead resistance barriers to watch for.
OVERHEAD RESISTANCE... The blue horizontal trendlines in Chart 1 show Fibonacci retracement lines measured from the mid-February high to Friday's intra-day low.Those percentage retracement lines act as potential overhead resistance points. The chart shows yesterday's early rebound meeting resistance at the 50% retracement line (and gap resistance left behind last Thursday in the red circle) before selling off sharply later in the day. That's the first barrier that needs to be overcome. If it is, the next potential barrier would be the upper 62% retracement line at 3188. The purple line also shows potential overhead resistance along the late January intra-day low at 3214. Those two upper lines could provide tougher barriers to overcome. Hourly bars offer a better look at those resistance levels.
A CLOSER LOOK AT HOURLY BARS... Chart 2 shows the same SPX chart using hourly price bars for the last couple of weeks. The same potential overhead resistance lines are shown from Chart 1. This chart shows the 14-hour RSI line bottoming late last week and climbing back over 50. That shows better short-term momentum. In addition, the hourly MACD lines in the lower box are in the strongest position since the February top. Those positive indicators, however, don't tell us what will happen if and when the SPX reaches those overhead resistance lines. My guess is that stocks may encounter more selling from there, which could lead to a retest of recent lows.
VIX IS BACK BELOW 40... Another encouraging sign is the CBOE Volatility (VIX) Index pulling back from overhead resistance near 40. The hourly bars in Chart 3 show the VIX gapping up to 48 last Friday before gapping back down on Monday. That left a small "island reversal" pattern overhead (red box) which usually signals a short-term reversal. The VIX has since retraced about half of its recent upward spike. That has also helped boost stocks this week.
10-YEAR TREASURY YIELD BELOW 1%... It seems a bit shocking to see the 10-Year Treasury yield falling below 1% this week for the first time in history. Especially after the Fed's half point rate cut yesterday. That shows that investors are still in very nervous mood, and skeptical about the staying power of this week's stock rebound. And still buying bonds for protection. The daily bars in Chart 4 show the TNX in a deeply oversold condition and struggling to regain its 1% line. A bottom in bond yields could help restore some confidence in the stock market.
LONG-TERM BOND IS VERY OVERBOUGHT... The daily bars in Chart 5 show the 20+ Year Treasury Bond iShares (TLT) in an overbought condition with a 14-day RSI at 75 (upper box). The longer maturity bond has led this year's strong rally in the bond market in a flight to safety from an overbought stock market, and the recent sharp selloff resulting from the coronavirus. Yesterday's green price bar has the look of a possible short-term buying climax. And it's trading slightly lower today. It's too soon to call that a top. But any sign of weakness in Treasury bond prices could be a sign that investors are regaining some confidence. That might even be enough to push the 10-Year yield back over 1%.
