Equity Rally Underway, But First Test Of The Bulls Comes This Week
In my last couple of articles on global equities, I made the point that various breadth and sentiment metrics were indicating a rally lay in our immediate future and we could look forward to a decent bounce in the S&P500 (SPY). That expectation proved to be correct and we have now rallied above initial resistance, gaining just under 2% for the week and clawing back a 6% loss to finish the month in positive territory, something that has happened only 8 times since 1970.
The key test now comes this week, with a retest of that initial resistance area in the 1930-1945 SPX region in play, and the bulls hoping that what was resistance now turns into support. For charting purposes I am using the SPY ETF where that same support area comes in at 193-194.50 and we must now hold above 190 at all times - the daily chart is below:
The current rally is very similar to the once we saw in September in terms of form and the technical picture. RSI, MACD and the STOCHASTICS all have a near identical look to them and as long as support holds I am expecting a similar outcome – namely a decent rally back up towards the highs over the next few weeks. Target zone #1 looks to be feasibly attainable.
Looking out into March and our future expectations for how high this rally can take us, there are a few things that stand when reviewing the technical backdrop. The first is that we have now had a bearish cross of the 8 & 34 month moving averages in the Value Line Geometric (XVG) chart, an event that has been a super-reliable indicator that an extended decline is about to unfold; and the second is that we have had a cross below the zero line of the Coppock Curve in the S&P500 (SPX) on the monthly timeframe.
Both of these indicators have been harbingers of doom in terms of the indices, and sharp declines have followed without fail every time we have had confirmed buy or sell signals since the late eighties. It is therefore not looking too good in respect of performance this year, and unless something dramatic happens to radically improve the moving averages I think we should be looking lower into the autumn once this current run higher completes.
Back in 2008 as the bear market decline was getting underway, we saw a back-test of the moving averages we had broken down through in January and February of that year (sound familiar?). March saw us begin a 14% climb that topped out in May at the 20 month moving average, and a similar rally now would take us to 2028 in SPX (202.81 in SPY) albeit at a much faster clip.
There is a very obvious head and shoulders pattern forming on the SPY weekly chart which I have illustrated above. To trigger the pattern we need only hold below the bull market highs and then close below the neckline at 181 – that would give us a measured move target towards 150. There is an open gap in SPY at 203.87 and the 50 week moving average comes in at 203.64 making this the most obvious target for the coming high, and a place at which I would certainly be looking to trim and trail any remaining long positions.
In summary then, as long as support holds in the early part of this week we should continue to look up in terms of our positioning, and aim for somewhere in the SPY 200-204 region over the next few weeks at which point we should become more cautious given that long term technical signals are flashing warning signs. If at any time we break down through SPY 190 we are at risk of the rally stalling, and if we were to break down through 181 we may already be in the next phase of a larger decline.
I wish you all good luck for the coming week.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities ...
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