Written by Jim Welsh
Macro Tides Weekly Technical Review Special Report 26 March 2020
After bottoming on February 28 at 2856 the S&P 500 rallied for 4 days before topping at 3131. This 4 day rally constituted Wave 2 from the February 19 high of 3393.
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Wave 3 bottomed on March 23 and Wave 4 has rallied for almost 4 days, so at today’s close Wave 4 is close to being equal to Wave 2. There are two price relationships that are coming into play just above the high of 2637 reached on March 26. The 38.2% retracement of the entire decline from 3393 to 2192 is 2650 (green). The 50% retracement of Wave 3 is 2664 (red). The closing high on March 13 at 2711 is also a chart level of resistance.
In the last 10 minutes of trading on March 26 the S&P 500 zoomed from 2580 to 2637 before closing at 2630. The Tick indicator measures how many stocks are rising on a plus tick minus the number of stocks that are falling. It is literally calculated every few seconds and is a good indicator of intra-day movements in the S&P 500. If the net Tick is rising over a period of time, the S&P 500 will be lifted as more stocks are rising relative to their prior trading price. When the S&P 500 is falling sharply, the Tick will be falling.
The chart below shows the high and low range for the daily Tick since February 28. The dash to the left is the opening level of the Tick and the right dash is the closing level. What is noteworthy is that the closing Tick finished the day on March 26 above +900. (red arrow) That has occurred on 3 prior days – March 4 +918, March 10 +1010, March 13 +1038, March 26 +1129. This is interesting since on the 3 other occasions that the closing Tick was above +900 the S&P 500 topped.
The combination of time between Wave 2 and Wave 4, retracement price targets, and the extreme closing Tick on March 26 makes March 27 a key day.
Since the closing low on March 23 the S&P 500 has rallied 17.5% on a closing basis, which places it in the middle of the range of prior rallies off an extremely oversold condition.
On March 31 the end of quarter rebalancing of allocations to bonds and stocks is expected to shift as much as $150 billion out of bonds into stocks, according to an estimate I heard on CNBC. If anything approaching this amount of money flows into stocks, the S&P 500 could rally up to 2800 in a spike.
Even a move of this magnitude would not eliminate the potential for a significant setback or complete retest of the March 23 low of 2192. However, if the S&P 500 manages to rally above 2856 that would lead me to question the likelihood of the S&P 500 falling back to the low. The Wave 1 low was 2856 and Wave 4 is not supposed to overlap Wave 1. If it does overlap it would suggest that the low was in place. I think this is unlikely given current circumstances, but the amount of fiscal and monetary stimulus is unprecedented.
The psychological impact of fiscal and monetary stimulus on institutional investors could lead them to ignore some really sad and ugly news. The number of infections and deaths will continue to rise and the economic data will verify that the U.S. and global economy was in free fall in March and probably April.
Investors are hoping the shelter in place orders in a number of states will be lifted shortly after their 2 week window. If they are extended, which seems quite likely, it will be interesting to see how investors respond. The longer the economy is shut down the risk for additional fallout within various sectors will increase.
The passage of the coronavirus stimulus bill is a step forward but the implementation will take time. We’ve seen how health care workers have been overwhelmed by the virus, and now government workers in states and at the federal level are going to be overwhelmed which will delay distributions.
One of the risks is that oil prices continue to fall as that will further undermine all the debt held by energy firms and lead to a rash of downgrades that rattles the high yield bond market. This risk in known which is why the U.S. is applying as much pressure as it can on Saudi Arabia to cut their production. The stock market would respond favorably if the Saudi’s did lower their production. My guess is the U.S. would have to agree to curb domestic production for any agreement to occur.
The longer weakness in the economy persists there is a risk that Moodys and Standard & Poors will lower their ratings on the huge pile of investment grade corporate debt that is rated BBB and one step above junk. I would not be surprised if Treasury Secretary Mnuchin isn’t twisting the arms of the rating agencies to delay any downgrades in light of the fiscal stimulus that is coming that could alleviate most of the cash flow squeeze many firms will experience in the short run. If the rating agencies announce that they will postpone making credit rating changes, due to the amount of fiscal stimulus that should help lift the U.S. economy in the second half of 2020, the stock market would respond favorably.
Policy makers are pulling out every measure they can to stabilize the financial system, provide a safety net under the economy, boost stock prices, and lower the stress level of the average American. This combination will help bolster consumer sentiment and spending once consumers are given the green light to leave their homes. The wild card is the virus itself and how long it will take until the curve flattens. No one knows.
The S&P 500 has just experienced its largest 3 day rally since 1931, after undergoing the largest decline since 1931 last week. For charts of all the significant declines since 1929, see Retest Coming? 26 March Update.
Good Luck day trading.
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