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.