In Fri’s Technical Blog we discussed ancillary explosive gains in gold and a continued bid to Treasuries near historically low rates that remain clearly as a result of a flight to quality because of coronavirus fears that could mean a relatively minor S&P failure could morph into a more serious correction. Such a correction is being realized today with this morning’s break below 10-Feb’s 3303 next larger-degree corrective low and our short-term risk parameter the market needed to fail below to be able to conclude last week’s 3398 high as THE END of the 5-wave rally from 31-Jan’s 3212 low and key long-term risk parameter.
Obviously, last week’s 3398 high is one of developing importance as a risk parameter from which non-bullish decisions like long-covers can now be objectively based and managed. And the market is closing in on 31-Jan’s pivotal 3212 low, the failure below which will break the broader uptrend and expose a larger-degree correction of at least the rally from 03Oct19’s 2855 low. Noting that this morning’s gap-down open however, traders are reminded that such “obvious” displays of weakness to the huddled masses and the hyperbole that’s sure to accompany it today are rare so early in a peak/correction/reversal threat. Indeed, the all-time high was achieved just two trading days ago. Markets, especially this one given its global depth and following, rarely accommodate the masses with an early scare allowing them to get out and then continue to reward that action.
What’s NOT unusual after such an obvious move is a (B- or 2nd-wave or right-shoulder) corrective rebuttal to an initial counter-trend break that could be extensive in terms of both price and time. It’s one thing to take defensive action by neutralizing bullish exposure below levels like 3355, 3303 and 3212. It’s something else entirely to prudently initiate a new bearish policy after clear momentum failures break the uptrend.
What we believe will lie ahead is a BULLISH divergence in shorty-term momentum somewhere around 31-Jan’s 3212 low. We do not know if it will break this low beforehand or not. Regardless, such a mo failure will arrest this plunge and reject/define a more reliable low from which bullish decisions can be objectively based and managed ahead of at least a corrective recovery that we believe could reach the 3325-to-3350-area and possibly a resumption of the secular bull. IF/when the market rolls over again with another bearish divergence in momentum that stems that rebound, we believe the elements will be in play for an excellent and favorable risk/reward SELLING OPPORTUNITY ahead of a more protracted correction that could span weeks or even months.
Looking at the daily log chart above and weekly log chart below, there is little in the way of technical levels of merit below 3212, making this threshold a key risk parameter for long-term players. Paring or neutralizing exposure on a sub-3212 failure is urged because the market’s downside potential below 3212 is indeterminable. Given the magnitude of the secular bull trend however, we would strongly suspect that any major correction would/should be contained by the 3115-to-3030-area marked by the 50% retrace of Oct-Feb’s rally and huge former resistance from Jul’19 that now serves as an equally huge support candidate. The point now however is that we CANNOT RELY on any such level or area to hold. That’s “hoping’ for it to hold. And hope is not an investment strategy. The only way to objectively navigate an end to this suspected correction would be via a confirmed bullish divergence in momentum. Until a mo failure arrests the slide, its downside potential is indeterminable.
These issues considered, shorter-term traders have been advised to move to the sidelines. A bullish policy remains advised for long-term players with a failure below 3212 required to negate this call and warrant its cover. We will be watchful in the week ahead and possibly even days ahead for a relapse-stemming bullish divergence in shorty-term mo that would reject/define a more reliable level from which a punt from the bull side would have favorable risk/reward merits ahead of at least a corrective rebuttal that we believe could reach the 3325-to-3350-area.