Written by Jim Welsh
Macro Tides Weekly Technical Review Update 18 March 2020
Selling has remained intense. This is clearly evident in the 21 day Advances minus Declines Oscillator which has been hammered after each attempt to bounce.
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The 21 day average of the number of stocks making a new 52 week fell to the second lowest level in decades (-906), second only to the financial crisis in 2008.
The 2008 experience could prove instructive as to what we can expect in coming weeks. After plunging in October 2008, the S&P 500 bounced and then dropped to a lower low in November. The new low was followed by another rally before the S&P 500 recorded its low for the bear market in March 2009.
The key point is the S&P 500 was 20% below the October 2008 low when it bottomed in March 2009. The other takeaway is how the 21 day average of new highs minus new lows behaved. It reached its most extreme level in October (-1050) and then made a higher low in November (-665) and an even higher new low in March 2009 (-389).
Given the intensity of selling pressure in recent days, and how low the 21 day average of new highs minus new lows has become, no one should be in rush to buy.
After the S&P 500 topped in mid February it dropped to 2856 before rallying to 3136 after the FOMC announced the first emergency rate cut. This is clearly Wave 1 and Wave 2 and has been followed by an unrelenting decline that represents Wave 3.
The question is whether Wave 3 bottomed today? It is a plus that the S&P 500 managed to close at 2398 on March 18 and above the December 2018 low of 2347, after falling to an intra-day low of 2280. In normal times this would be a clear sign of at least a short term trading low.
In this environment normal doesn’t apply.
A quick review of how the S&P 500 has stair stepped lower since topping at 3136 indicates only 7 small waves. Regular moves comprise 5 small waves. Extended moves that encompass a larger price move can have either 9 or 13 small waves.
Since the drop from 3136 has only 7 waves it implies that the S&P 500 will bounce for wave 8 and then drop below 2280 for wave 9. Once that is in place a longer lasting rally can take hold for Wave 4 from the mid February peak.
The analysis of the 21 day average of new highs minus new lows supports the expectation that after Wave 4 runs out of steam it will be followed by Wave 5 and result in the S&P 500 falling to a new low. When a Wave 3 move comprises 9 or 13 small waves, Wave 5 is often similar in length to the length of Wave 1. Wave 1 was 537 points as the S&P 500 dropped from 3393 to 2856. If the coming Wave 4 is comparable to the Wave 2 rally, it can carry the S&P 500 up to 2560, which is very close to the high of 2554 on March 17. Amazing that that was just yesterday!
If the S&P 500 does manage to bounce to 2560, Wave 5 could take it down to 2023 if Wave 5 is exactly as long as Wave 1. Once there is a complete 5 wave decline in place from the mid February high, a big rally can follow. The key is waiting until the selling pressure as measured by momentum indicators confirm that the sellers are becoming exhausted.
It is possible that 10 million workers or more will be out of work within the next week. The economic impact will be severe no matter what the government does to soften the blow.
Disclosure
The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The Nasdaq 100 is composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. All indices, S&P 500, Russell 2000, and Nasdaq 100, are unmanaged and investors cannot invest directly into an index.
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