Market Observations - as of May 1, 2020

By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice.

The bounce from March 23rd continued this week, peaking on Wednesday, then pulling back and challenging the Trend Line support on Thursday. Friday saw a clear gap down and selling below the Trend Line Support for this 5.5 week rally. We will look at the S&P charts below to see the details of this week’s actions and its longer term ‘Context’.

We see similar behavior this week in the other major indexes, peaking on Wednesday, pulling back some on Thursday, and then dropping harder on Friday.

By comparing the Wednesday Peaks this week for each of the major indexes, we can see a relative picture that clearly shows us the stronger and weaker indexes. A useful tool for these measurements is the ‘Fibonacci Retracement’ study. The Drop from the Feb. Highs to the March lows is measured for each index being studied, and this is the 100% range that is used for comparisons. If an index bounces and returned half of its (Feb-Mar) drop, then that is a 50% ‘Retracement’. Fibonacci Ratios are used as common levels to identify in the ‘Retracement’ study of 61.8%, 38.2%, 23.6% and 78.6% in addition to 50% and 100%. The dominant Fib ratios are 61.8% and 38.2%.

When we place this Fibonacci Retracement study on the chart for each index being studied, we can clearly see how much of their Feb-Mar drop has been recovered at Wednesday’s highs this week. We can see that the Nasdaq composite has recovered as much as 75.5%, the S&P was just a little bit more than 61.8%, the Dow was about half way in between 50% and 61.5% and the Russell 2000 was a little above its 50% level.

This week we had a Fed meeting announcement on Wednesday that was not too significant as the markets rallied a little higher in the 100 minutes afterwards, then sold off the highs of the day very quickly the last 15 min of Wednesday’s session.

Oil dropped a bit on Monday and continued lower that evening before reversing and saw a rally begin very early on Tuesday that continued through most of this week, closing higher for the week.

Gold was mostly horizontal this week, then dropped on Thursday and bounced a little on Friday to recover about half of the prior day’s losses.

The Fed has just about killed the Bond Markets, with affectively keeping yields mostly unchanged.

The US dollar weakened each day this week, with a violent brief drop seen on Thursday when the US markets opened.

The VIX remained in a narrow range this week mostly between 31% and 35%, then popped higher (36.5% to 39.5%) on Friday as the markets gapped down and broke below support.

The key question this week: Is the bounce rally done? We have seen higher highs and higher lows since March 23rd, as well as gap downs on April 1st and 21st, but this Friday broke below the Trend Line created by this bounce rally. How the markets act next week is the key to find clues to answer this question. [1] We will see if Friday’s lows (May 1st) hold as support or not going forward. [2] If that fails then the next key support could be found at the major Moving Averages (50 day or 20 day). If that fails, then [3] then the April 21st lows is the next area to see if we see support or not going forward. The more levels of support that are broken, the more convictions we see from the bears.

We must also be open to the other possibilities, for a rally next week, or for a period of horizontal consolidation. Anything can happen, so we prepared for a variety of possibilities.

Now, let’s look at the charts to see what they can tell us about this market.

S&P 500 monthly chart as of May 1, 2020 – On the Monthly chart we can see the 11-year bull trend and Support Trend Line (Blue line) from the March 2009 lows. We see that this Trend Line was broken below in the prior 2 months, but currently price is back above this line.

S&P 500 weekly chart as of May 1, 2020 – On the weekly chart we can see how the 11-year Trend Line (Blue line) was broken below then bounced back above this Trend Line the past 2 to 3 weeks. We can see the Highest level in this bounce was this week but did not hold and this week closed down a little, leaving a long upper candle wick (Inverted Hammer). The close this week remained above the 11-year Trend Line.

S&P 500 daily chart as of May 1, 2020 – On the Daily chart we have added the Fibonacci Retracement study (Purple). We can see that Wednesday briefly broke above the 61.8% Retracement level then pulled back on Thursday. Friday saw a gap down and sell off that ended the week with the S&P down by -0.21% and still above its 20 day (Yellow) and 50 day (Blue) SMAs. Note the Red Trend Line Support drawn from the March 23rd lows to the Tuesday’s lows (Apr 28th). This support was challenged on Thursday, and then clearly gapped below on Friday. We can see these details clearly on the 30 min. S&P chart below.

S&P 500 30 min. chart as of May 1, 2020 – The Red Trend Line Support was challenged on Thursday, then clearly gapped below on Friday this week. If next week we see the 11-year Trend Line (Blue line) and the April 21st prior lows exceeded, than we will have a confirmed bearish change. Breaking the Red Trend line this week is a first clue. How the market acts next week will either add to the bearish clues, or challenge them with bullish clues. Time will tell.

DJIA weekly chart as of May 1, 2020 – Here we can see that the Dow did bounce the past 5-6 weeks to at least break above its 200 week SMA. However, the Dow has remained below its 100-year Trend Line Support since mid March and so far has not been able to return to this long term support TL.

DJIA daily chart as of May 1, 2020 – The Dow did cross above its 50 day SMA on Monday and remained above this key level all of this week. The peak on Wednesday was in between the 50% and 61.8% Retracement levels, showing less ‘recovery’ in April than the Nasdaq or S&P. The Dow closed this week down -0.22% and remains just above its 20 day and 50 day SMA, which are about to cross.

NASDAQ weekly chart as of May 1, 2020 – Here we can see the Nasdaq composite was below its 11 year Trend Line Support (Blue line) only briefly, about 2-3 weeks in late March and has been above the past 4-5 weeks. Also, the Nasdaq is above its 200 week and 50 week SMAs, and seemed to find resistance the prior 2 weeks near its 20 week SMA (Yellow). Note the tall candle wick this week as the Nasdaq peaked and reversed mid week.

NASDAQ daily chart as of May 1, 2020 – On the daily chart we can see that the Nasdaq has been back above all 3 SMAs for the past 8 sessions. The peak high on Wednesday was about 75.5% retracement of the Feb-Mar drop, a bit above the 61.8% Fib level. The Nasdaq closed Friday less than 9 points below the 61.8% Retracement level, and down -0.34% for the week.

Russell 2000 weekly chart as of May 1, 2020 – The Russell saw Resistance near the 1252 level the prior 3 weeks. This level is near the 38.2% Fib Retracement level. This week the Russell broke out dramatically, and then gave back most of this week’s gains by Friday’s close. Note the very long upper wick on the weekly candle indicating the reversal this week.

Russell 2000 daily chart as of May 1, 2020 – On the daily chart we can see the 38.2% Resistance in April that broke on Monday this week. The peak on Wednesday was just above the 50% level. The sell off on Thursday and gap down on Friday caused the Russell to end the week near its 50 day SMA, near its 38.2% Fib level and up only +2.22% for the week.

Next we will look at a few key ‘Market Internals’.

McClellan Summation Index weekly chart as of May 1, 2020 – Here we see a strong rally this week in positive breadth acceleration.

McClellan Summation Index daily chart as of May 1, 2020 – Note the continued breadth increases this week that slowed only a little on Friday.

NYSE percent above 200 day SMA weekly chart as of May 1, 2020 – As for the percent of stocks above their 200 day SMA, we saw an overall small decrease this week, after a brief spike mid week.

NYSE percent above 200 day SMA daily chart as of May 1, 2020 – Here we can see the daily peak on Wednesday that was right at the 50 day SMA of this indicator, followed by a drop on Thursday and Friday to close the week down a little with only 14.16% of NYSE stocks now above their 200 day SMA.

NYSE percent above 50 day SMA daily chart as of May 1, 2020 – Here we see a strong gap up and reversal mid week, with the tall upper wick on the weekly candle. Overall, the week ended with now 44.54% of NYSE listed stocks now above their 50 day SMA.

NYSE percent above 50 day SMA weekly chart as of May 1, 2020 – On the daily chart we see the strong increase, then two day decrease after Wednesday’s peak.

NYSE Advance Decline Line daily chart as of May 1, 2020 – Here we see lots of gaps as the number of stocks shifted between advancing and then to declining the later part of this week.

VIX daily chart as of May 1, 2020 – The VIX continued its slow decline this week, then closed higher on Thursday and Friday, closing the week a little higher than last week.

Next we will look at a few key Commodities, Currency and Treasuries.

Oil daily chart as of May 1, 2020 – Oil dropped Monday, then began to rally the rest of this week, closing near its 20 day SMA.

GOLD daily chart as of May 1, 2020 – Gold dropped a bit on Monday and Tuesday to find support Tuesday and Wednesday at its 20 day SMA. Thursday Gold dropped below its 20 day SMA. Friday saw a bit of a bounce but remained below its 20 day SMA.

US Dollar Index daily chart as of May 1, 2020 – The US dollar Index declined each day this week, crossing below its 20 day SMA on Tuesday, below its 50 day SMA on Thursday and ending the week just above its 200 day SMA.

US 10 year Treasury daily chart as of May 1, 2020 – Note the declining size of the daily candles, the low volatility (ATR) and volume the past few weeks. This is a very quiet and horizontal chart showing little to no action in the 10 year Treasuries as the Fed has been buying everything it can.

US 10 year Yield daily chart as of May 1, 2020 – The same story in the 10 year Yield, as this market is being managed to a narrow range by the Fed.

US Yields daily table as of May 1, 2020 – With the new month beginning on Friday, we see low Yield rates that have changed little and show a mild slope without any inversions.

FOMC Balance Sheet weekly chart as of April 29, 2020 – Over this past week the Fed added another $82.79 Billion of liquidity to the markets. The Fed meeting this week (Apr 28th) kept Interest rates unchanged and reiterated that it will do whatever it takes to ensure ample market liquidity. The current Balance sheet is now at $6.655 Trillion.

Next we will look at a few key Sectors.

Dow Transports daily chart as of May 1, 2020 – We see a rally above the 50 day SMA Wednesday, that was mostly given back on Thursday and Friday as the Transports crossed back below its 50 day SMA to find support near its 20 day SMA, closing up 0.65% for the week.

XLE daily chart as of May 1, 2020 – The Energy sector closed nearly on its 50 day SMA on Tuesday and gapped higher on Wednesday. Thursday and Friday gave back part of these gains as support was found near its 50 day SMA. The XLE closed the week up +3.55%.

XLF daily chart as of May 1, 2020 – The Financial sector briefly peaked above its 50 day SMA on Wednesday, then fell back below on Thursday and gapped lower on Friday to find support near its 20 day SMA. The XLF closed the week up 1.47%.

QQQ daily chart as of May 1, 2020 – The Tech heavy Nasdaq-100 saw some whip-lash this week with key earnings from its largest components (AAPL, MSFT, AMZN, GOOGL, FB and many others). The QQQ ended the week down -0.51%.

SOXX daily chart as of May 1, 2020 – The Semiconductor sector rallied and peaked on Wednesday at about a 75% Retracement of its Feb-Mar decline. The SOXX sold off on Thursday and gapped lower on Friday to cross and close below its 20 day and 200 day SMAs, down -3.10% for the week.

XLC daily chart as of May 1, 2020 – The Communications Services sector rallied up to its 200 day SMA on Wednesday, then pulled back a little on Thursday and Friday, closing the week up +1.89%.

XLY daily chart as of May 1, 2020 – The Consumer Discretionary sector is dominated by AMZN that reported earnings this week on Thursday after the close. We can see the gap down in this sector as AMZN dropped on Friday. The XLY closed the week at almost even, down -0.01%.

XLP daily chart as of May 1, 2020 – The Consumer Staples sector rallied a little on Tuesday, then drifted lower the rest of this week, crossing below its 20 day SMA on Thursday and finding support near its 50 day SMA on Friday. The XLP closed the week down -1.86%. This suggests that Friday was a sell everything day, verses a rotate into safe sectors day.

XLU daily chart as of May 1, 2020 – The Utilities sector looks like the XLP chart, in that it saw a small rally on Tuesday, then strong selling the last 3 days of the week, crossing below its 20 day SMA on Thursday and closing Friday down -4.18% for the week. Here too we see signs of a ‘sell everything’ day on Friday. The XLU was the weakest sector on my list this week.

XHB daily chart as of May 1, 2020 – The Home Builders sector rallied strong and gapped higher on each of the first 3 days of this week, crossing above its 50 day SMA on Tuesday. On Thursday and Friday we see a smaller pull back that closed above the 50 day SMA and up +8.30% for the week. XHB was the strongest sector on my list this week.

Weekly Percent Change US Indexes and Sectors table as of May 1, 2020 – Here we see a wide array of different performances for this week, from -4.18% to +8.3%. Some of the stronger sectors this week included XLE, XRT and XME. The weaker sectors included SOXX and XLV.

Next we will look at a few key Stocks.

MSFT daily chart as of May 1, 2020 – Microsoft reported earnings after the close on Wednesday, gapped higher on Thursday then sold back down on Friday to end the week up only +0.01%. MSFT recovered about 81% of its Feb-Mar drop at the highs on Thursday of this week.

AAPL daily chart as of May 1, 2020 – Apple reported earnings on Thursday after the close, and saw a drop in after hours trading that day, followed by a rally the first 40 min. of trading on Friday up to $299. A lot of those gains were given back by the close on Friday near $289. AAPL closed the week up +2.16%. AAPL recovered about 75% of its Feb-Mar drop at the highs on Friday of this week.

GOOGL daily chart as of May 1, 2020 – Alphabet sold off a bit on Tuesday in front of earnings that day after the close. After earnings were out the afterhours trading saw prices rally up to the $1346 area. Most of these gains were retained as trading opened on Wednesday. Thursday saw only a small decline, while Friday saw more of a decline that took back only a small portion of the post earnings rally. GOOGL closed the week up +3.19%. GOOGL recovered over 66% of its Feb-Mar drop on Wednesday of this week.

AMZN daily chart as of May 1, 2020 – Amazon rallied in front of earnings on Tuesday, Wed. and Thursday. After earnings came out, prices dropped in after hours trading to the $2320 area. Friday saw a large gap down and continued selling as AMZN closed the day at $2286.04, just above its 20 day SMA and down -5.15% for the week. AMZN recovered its entire Feb-Mar drop on April 14th.

FB daily chart as of May 1, 2020 – Facebook reported earnings on Wednesday after the close. After hours trading rallied up to the $217 area. Prices pulled back a little bit on Thursday and Friday with FB closing the week up +6.42%. FB has now recovered over 70% of its Feb-Mar drop.

NFLX daily chart as of May 1, 2020 – NFLX paused on Monday then sold off to its 20 day SMA on Tuesday. Wednesday saw a brief dip below its 20 day SMA then closed back above. Thursday and Friday drifted higher, remaining above its 20 day SMA support and testing resistance near Monday’s close. NFLX closed the week down -2.29%. NFLX recovered all if its Feb-Mar drop on April 13th.

JPM daily chart as of May 1, 2020 – JP Morgan rallied above its 20 day SMA on Monday, peaked on Wednesday just below its 50 day SMA and pulled back Thursday and Friday to close the week near its 20 day SMA and up +2.80% for the week.

MA daily chart as of May 1, 2020 – MasterCard moved higher on Monday and Tuesday to find resistance near its 50 day SMA in front of Earnings. Earnings came out before the open on Wednesday and gapped hither to cross and close just a little above its 200 day SMA. Thursday and Friday pulled back to give back most of Wednesday’s gap. MA closed Friday just above its 50 day SMA and up +3.86% for the week.

COST daily chart as of May 1, 2020 – The volatility is slowly coming out of COST, as price dropped this week to test several times support near its 50 day SMA. COST closed the week down -2.56%.

TSLA daily chart as of May 1, 2020 – Tesla reported earnings Wednesday after the close to see after hours trading rally to $886 and then drift back a little. Thursdays higher open saw selling that took back all of the earnings gains and then some. Friday saw some strong selling that kicked in about 90 min. after the open. Support was found Friday near its 20 day SMA. TSLA closed the week down -3.29%.

AMD daily chart as of May 1, 2020 – AMD reported earnings on Tuesday after the close, and prices dropped to the $52.50 area in afterhours trading. Selling continued this week, crossing below its 20 day SMA on Thursday and gapping lower on Friday to close the week just above its 50 day SMA and down - 11.21% for the week.

HD daily chart as of May 1, 2020 – Home Depot gapped up on Monday and crossed above its 200 day SMA on Tuesday. The rest of the week saw HD remain in a narrow range mostly below its 200 day SMA. HD closed the week up +3.01%.

WMT daily chart as of May 1, 2020 – Wal-Mart remained just above its $127.7 support the first two days of this week, then gapped below its 20 day SMA on Wednesday and continued selling lower on Thursday. Friday saw a small bounce that recovered only the prior day’s losses. WMT closed the week down -5.04%. Similar to COST, WMT has also seen some volatile action the past 2 months.

JNJ daily chart as of May 1, 2020 – On Monday JNJ remained within its prior day’s range. Tuesday saw a gap down that continued the rest of the week, finding support near its 20 day SMA at the end of this week. JNJ closed the week down -4.24%.

As we have seen in the charts above, Friday showed us a change in character, with the sellers showing up with convictions. Even some ‘safe’ sectors were sold on Friday. A lot can change over the week end, and with a news driven market we can changes at any time. We will watch carefully this next week to see if support is shown, somewhere. Once we do see the evidence of support (a decline stops) then we will watch for the buyers to begin to show up, once they recognize that same support. In time, we will observe confirmation either way.

Trade Smart,

CJ