Wednesday saw a second day of strong gains in the market although comments from Senator Sanders against the stimulus bill sent markets tumbling late in the day, under cutting the strength of the rally. Both the Dow and the S&P closed higher but the NASDAQ closed down on the day. There are signs tonight that the rally may be about to reverse.
Stock Market Outlook Chart Comments At The Close on Wed Mar 25 2020
The SPX chart continues to be very bearish.
There are now 4 sell signals on the market which are in the chart below in pink.
The closing candlestick tonight is advising that a reversal may take place either Thursday or Friday.
All the moving averages are plunging but the 21 day is in a relentless tumble lower.
Overall the chart is ugly for equities. One good indicator is the Lower Bollinger Band which is trying to turn sideways, which if it does would indicate the index is trying to make a bottom of sorts.
Stock Market Outlook: Technical Indicators Review:
Momentum: Momentum is rising and still negative although not as oversold. I have shown with a red arrow how momentum is matching prior spikes but has yet to break above it. At present this signals a bounce has occurred before more selling starts.
- 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 quite a bit weaker on Wednesday but still indicating the market has more room to fall.
- 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 is moving sideways and it too has the same pattern as momentum. Basically, it is at a level which signals the bounce in the index is over.
- 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 an up signal in place and is still 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 rising and no longer oversold. It too has the same pattern as we see in Momentum and the Ultimate Oscillator.
- 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 also rising but it too has failed to break above the past spikes which are marked in the chart above. This is bearish.
- 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:
2700 is strong resistance and was a drop of 20.4%.
2675 is light resistant
2650 is resistance
2625 is light resistance
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 drop of 1393 points for a 41% correction. More analysts are jumping onto this level as where the correction is heading.
Stock Market Outlook for Tomorrow – Thu Mar 26 2020
The technical indicators tonight could be called inflection point. Most are signaling that if the market slips back, selling will resume and the rally on Tuesday and Wednesday was just a bounce in the bear market. Bounces can be huge in every bear market and they can be strong and swift. That’s exactly what we have seen over the past two days. With the coronavirus stimulus bill on the verge of being passed we could see a bit more of a rally attempt on Thursday but for now, the indications are that we are doing to see further weakness and dips. The only way for this to change is if the technical indicators above, break above the trend lines shown and close above them more than once. That would signal the market, at least for now, is trying to build a bottom.
The number of cases of coronavirus are continuing to climb and with much of the world in almost a quarantine type environment, the economic damage could be massive and stretch beyond a single quarter as most hope. With word that a second stimulus bill will probably have to be entertained, the main thing keeping stocks afloat is the huge ocean of liquidity being created by these stimulus packages. The country cannot stay “locked” up for too long without causing a lengthy period of recovery. If selling resumes it may start off small but could snowball if many of the stocks bought over the past two days tumble again. Caution is definitely warranted as talk of how a new bull market is almost ready to start is wishful thinking. In a world where people have become accustomed to instant results, this market probably has more “bear” ahead of it. I used the rally to raise additional cash by selling out of stocks bought over the last week and Monday and I have been closing many other trades setup during the plunges. I think having a lot of cash is still going to pay big returns at some point in the days ahead.