RETEST OF RECENT LOWS TAKING PLACE -- FRIDAY'S LATE REBOUND IS MILDLY ENCOURAGING -- BUT MONTHLY INDICATORS WARN OF POSSIBLE TOP
NASDAQ HOLDS 200-DAY LINE... Let's start with some good news. Heading into the close yesterday afternoon (Friday), stocks were under heavy selling pressure. And the Nasdaq Composite Index was in danger of closing below its 200-day moving average for the first time since last spring. A late stock rebound, however, prevented that from happening. The daily bars in Chart 1 show the Nasdaq managing to close above its red line even though it lost ground on the day. That also kept it above potential chart support along its July high (green trendline). That doesn't guarantee it will stay above those potential support levels. But it did on Friday which prevented a more serious breakdown. We'll take that small victory for now. A lot of us have been calling for a retest of the previous week's lows as a necessary part of any potential bottoming process. This week's selloff put those lows in focus. Friday's late rebound was mildly encouraging. But we'll need to see more upside follow-through next week to determine if a short-term bottom is being formed.
DOW AND S&P 500 MOVE CLOSER TO FEBRUARY LOW... The Dow and S&P 500 ended the week well below their 200-day lines. And both lost ground on Friday; but showed small gains on the week. The daily bars in Charts 2 and 3 show prices for both indexes closing in the upper part of their daily range for the second Friday in a row. The first one led to this week's rebound. It remains to be seen if we get another rebound next week. One encouraging sign may be the fact that their 14-day RSI lines (upper boxes) are slightly higher that the previous week. That short-term positive divergence may be hinting at some price stability over the short-run. Intra-day charts may be suggesting the same thing.
INTRA-DAY CHART SHOWS POTENTIAL SUPPORT... Sometimes daily bar charts aren't sensitive enough to study very short-term market moves. Intra-day charts work better for that purpose. A couple of messages this week used them to analyze short-term moves. Below is an updated version of one of them. Chart 4 plots 30-minute price bars for the S&P 500 over the last eight trading days. And it paints a slightly encouraging picture. The two intra-day peaks on Tuesday and Wednesday mark short-term resistance levels (top red line). Friday's drop below Tuesday's intra-day low at 2976 signaled a retest of the previous week's lows. Those intra-day lows range from 2880 to 2855 (green lines). The last price bar shows buying coming into the market during the last half hour of Friday trading. And in heavier trading. That suggests that a retest of the earlier lows is taking place. And may be holding. The 30-minute bars may also be suggesting that this week's selling was overdone and the market is trying to stabilize above their February lows. The intra-day RSI and MACD lines in the upper two boxes may also be supportive over the short run.
MONTHLY INDICATORS LOOK TOPPY... Now for some bad news. Even if stocks attempt a rebound of some type in the foreseeable future, that rebound could be part of a major topping process. At least that's the message from Chart 5 which plots monthly bars for the S&P 500 over the eleven year bull market starting in 2009. Along with a couple of technical indicators that both look toppy. The solid blue line overlaid over the price bars plots a 9-month RSI line. That measure of long-term momentum shows a pattern of rising peaks over most of that decade. Succeeding peaks during 2011, 2013, and the end of 2017 reached higher levels (rising trendline). But have been trending lower since then.
DECLINING RSI PEAKS... The first down blue arrow in the second half of 2018 shows the first declining RSI peak; and helped warn of the late 2018 stock plunge of nearly -20%. The second blue arrow shows the latest move by the RSI into overbought territory over 70 at the end of 2019 being even lower than the two prior peaks. That's a big negative divergence between the lower RSI line and a stock market reaching new records. And is a serious warning that the bull run may have run its course. There's another monthly indicator giving a similar warning.
MONTHLY MACD DIVERGENCE... The upper box in Chart 5 plots monthly MACD lines for the SPX. There again, a pattern of rising peaks existed throughout the bull market until 2018 when it reached its highest level. The last MACD peak that formed at the end of 2019, however, failed to reach its 2018 high. That's the first lower MACD peak since the bull market began eleven years ago. And its two MACD lines are turning negative. That negative divergence between them and the recent record in the SPX is another warning that the longest bull market in history may be ending.
