With fear of the COVID-19 virus running wild over the weekend as more cases were announced, the Fed cut interest rates on Sunday to zero and announced massive quantitative easing. Those two combined to create a perfect storm on Monday and the markets opened limit down as once again investors decided it was time to get out of stocks or out of what they had recently bought perhaps in the belief that market collapse had ended with Friday’s massive rally. But this is a bear market and a lot of investors may have not gone through a bear market. They have enormous swings so a thousand point gain and plunge are not unusual for the Dow Jones in a bear market.
Monday saw the second worst single day for the Dow Jones since 1987 and its third-worst day in history. The index fell 12.93% by the end of the day, closing at the lows of the day and marking the lowest close in two years. The crash of Oct 19 1987 was 22.6% but Monday was still another stunning day for stocks. The S&P ended down 11.98% also the worst day since the 1987 crash. The NASDAQ had its worse day in history falling 12.32%. The VIX Index posted the highest recorded close ever at 82.69 just above the financial crisis peak of 80.74.
A collapse as big as was seen on Monday is almost always followed by a massive rally and the futures early evening point to a potential 800 point jump for the Dow. Does this mean the “V” shape recovery is underway? That’s very doubtful as the COVID-19 will be with us for a while yet. A working vaccine however would recover markets in what would be the biggest jump in history, but that’s not in the near future. On Tuesday if there is a bounce it’s a chance for more profits and to setup more trades before the next leg lower.
Stock Market Outlook Chart Comments At The Close on Mon Mar 16 2020
The SPX chart continues to be very bearish. The index closed at the lows of the day, 2386 and just 40 points from my goal of 2344. The closing candlestick on Monday is bearish but it once again points to a good chance for a significant bounce. Another interesting aspect of the chart is the Upper Bollinger Band which was starting to turn lower, is back moving sideways and does not indicate a larger drop is coming, at least not yet.
The technical indicators have largely been ignored in the decline and will continue to be so until there are signals that either a vaccine has been made available or cases slow and reverse or the government can show they have matters well in hand. None of that seems likely this week.
Today a third sell signal appeared in the chart with the 21 day falling below the 200 day. A fourth sell signal is shaping up as the 50 day is getting set to fall below the 100 day. Then a fifth sell signal is likely with the 50 day falling below the 200 day probably within a day or two of falling below the 100 day. These are strong sell signal and advise that we will not see a V shaped recovery. That though does not mean we won’t see rallies and some could be quite strong.
All the moving averages are moving lower with the 50 day back below 3200 and the 21 day falling to the 3000 valuation.
The Lower Bollinger Band is falling rapidly which is a signal for more downside this week. The closing candlestick was back outside the Lower Bollinger Band which is almost always followed by a bounce attempt. The index today made another new low of 2380.94 which is also a new 52 week low. This is now down 1013 points, 29.8% below the all-time high.
Stock Market Outlook review of Mar 16 2020
Stock Market Outlook: Technical Indicators Review:
Momentum: Momentum is falling, negative and extremely oversold.
- Settings: For momentum I use a 10 period when studying market direction.
MACD Histogram: MACD (Moving Averages Convergence / Divergence) issued a down signal on Friday Feb 21. The down signal was extremely strong on Monday and oversold.
- Settings: For MACD Histogram, I am using the Fast Points set at 13, Slow Points at 26 and Smoothing at 9.
Ultimate Oscillator: The Ultimate Oscillator signal dropped on Monday but looking at the chart you can see that it is more sideways than actually up or down.
- Settings: The Ultimate Oscillator settings are: Period 1 is 5, Period 2 is 10, Period 3 is 15, Factor 1 is 4, Factor 2 is 2 and Factor 3 is 1. These are not the default settings but are the settings I use with the S&P 500 chart set for 1 to 3 months.
Slow Stochastic: The Slow Stochastic has a neutral signal in place and is extremely oversold.
- Settings: For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic tries to predict the market direction further out than just one day.
Relative Strength Index: The RSI signal is falling and a bit oversold.
- Settings: The relative strength index is set for a period of 5 which gives it 5 days of market movement to monitor. It is often the first indicator to show an overbought or oversold signal.
Rate of Change: The rate of change signal is falling deeper signaling much lower prices. It is oversold.
- Settings: Rate Of Change is set for a 21 period. This indicator looks back 21 days and compares price action from the past to the present. With the Rate Of Change, prices are rising when signals are positive. Conversely, prices are falling when signals are negative. As an advance rises the Rate Of Change signal should also rise higher, otherwise the rally is suspect. A decline should see the Rate Of Change fall into negative signals. The more negative the signals the stronger the decline.
Support and Resistance Levels To Be Aware Of:
3000 is resistance
2960 is light resistance
2900 is light resistance
2860 is light resistance
2840 is light resistance
2800 is strong support
2745 to 2750 is light support
2725 is light support
2700 is strong support and marks a full correction of 20.4%.
2675 is light support
2650 is support
2625 is light support
2600 is resistance
2550 is light resistance
2500 was good support and marked a correction of 26.3%
2344 is the next level of support and marks a 30.9% correction.
2100 is light support
2000 is good support and marks a 41% correction.
Stock Market Outlook for Tomorrow – Tue Mar 17 2020
Futures following a tweet from President Trump, announcing support for the airlines jumped to start the day but it is still a long time before Tuesday opening at 9:30.
The indicators though are supportive of another bounce attempt. The market is almost ridiculously under priced with many stocks at or below levels seen in the credit crisis. Selling has been dramatic and panic filled. This leads to large bounces.
Tuesday looks like a large bounce will occur. When it does I will be setting up some further credit call spreads and a few covered calls as well. This was the strategy on Friday in the massive rally and they were closed on Monday in the stunning drop. Another massive rally will allow for more trades to be setup while waiting for the next drop in the markets. Other trades are in the members Market Breadth Indicator and Investing Strategy Notes for Tuesday.
One thing to be more aware of is that with stocks this low, a large part of the selling is probably over. Even a 15% further drop is smaller than the 30% already received. However many stocks are well below 30% down and that means there is a chance the next bounce might last a day or even two so it is something to be aware of when setting up trades on Tuesday that maybe on Wednesday the cycle of down, up and then down might just be broken, for at least a day. Stocks are extremely oversold but the outlook still appears unlikely that this is over. A dip down to 2344 I think is still in the cards. Let’s just hope that the analysts now calling for a drop to 2000 before this is over, are wrong.
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