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Technically Speaking: Sellable Rally, Or The Return Of The Bull?



  • As expected, the market rallied hard on Monday on hopes that the Federal Reserve, and Central Banks globally, will intervene with a "shot of liquidity" to cure the market's "COVID-19" infection.
  • While the volume of the rally on Monday was not as large as Friday's sell-off, it was a solid day nonetheless and confirmed the conviction of buyers.
  • It is absolutely "possible" the markets could find a reason to rally back to all-time highs and continue the bullish trend.

Typically, "Technically Speaking," is an analysis of Monday's market action, and the relevant risk/reward dynamics for investors. However, this week, we need to update the strategy we laid out in this past weekend's newsletter, "Market Crash & Navigating What Happens Next."

Specifically, we broke down the market into three specific time frames looking at the short, intermediate, and long-term technical backdrop of the markets. In that analysis, our premise was a "reflexive bounce" in the markets, and what to do during the process of that move. To wit:

"On a daily basis, the market is back to a level of oversold (top panel) rarely seen from a historical perspective. Furthermore, the rapid decline this week took the markets 5-standard deviations below the 50-dma."

Chart updated through Monday.

"To put this into some perspective, prices tend to exist within a 2-standard deviation range above and below the 50-dma. The top or bottom of that range constitutes 95.45% of ALL POSSIBLE price movements within a given period.

A 5-standard deviation event equates to 99.9999% of all potential price movement in a given direction.

This is the equivalent of taking a rubber band and stretching it to its absolute maximum."

Importantly, like a rubber band, this suggests the market "snap back" could be fairly substantial, and should be used to reduce equity risk, raise cash, and add hedges."

Importantly, read that last sentence again.

The current belief is the "virus" is limited in scope, and once the spread is contained, the markets will immediately bounce back in a "V-shaped" recovery. Much of this analysis is based on assumptions that "COVID-19" is like "SARS" in 2003, which had a very limited impact on the markets.

However, this is likely a mistake as there is a very important difference between COVID-19 and SARS, as

This article was written by

Lance Roberts profile picture

After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; I have pretty much "been there and done that" at one point or another. I am currently a partner at RIA Advisors in Houston, Texas.

The majority of my time is spent analyzing, researching and writing commentary about investing, investor psychology and macro-views of the markets and the economy. My thoughts are not generally mainstream and are often contrarian in nature but I try an use a common sense approach, clear explanations and my “real world” experience in the process.

I am a managing partner of RIA Pro, a weekly subscriber based-newsletter that is distributed to individual and professional investors nationwide. The newsletter covers economic, political and market topics as they relate to your money and life.

I also write a daily blog which is read by thousands nationwide from individuals to professionals at www.realinvestmentadvice.com.

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Comments (14)

Remember back in late 2019 when the media loudly announced that brokerages were eliminating trading fees and account minimums? At that time, a big rally was in progress, driven by the Fed's secret support of hedge funds, which began on September 17 (the financial media pretended that it was a legitimate rally and didn't reveal until much later that it was driven by certain behind-the-scenes Fed activities). Apparently, all of that was a scheme designed to pull in lots of "dumb money" to keep the rally going. Eventually, in February 2020, the Fed stopped supporting the hedge funds and the market stalled, leading to a massive selloff. My suspicion is that, as planned, the Wall Street sharks are scooping up all of that "dumb money", and when they finish doing that, the market might start going up again.
Buyandhold 2012 profile picture
Return of the bull.

Can't you hear the bulls stampeding?

I love the sound of bulls stampeding.

It sounds like victory.
Stampeding right off a cliff while hoping for the next central bank cheap money high.
@rubber duck,Thank you. This market is so schizophrenic,it needs to take a pill. We were headed to a much needed correction,but it looks like the band will play on....until we crash.
"The most important WARNING is the negative divergence in relative strength (top panel). This negative divergence was seen at every important market correction event over the last 25-years."

- RSI divergence chart: static.seekingalpha.com/...

That's right, such 'HUGE' divergences resulted into Dotcom Bust.


Why is it that Divergence Sell Signals happen?

- because previous strong rally becomes too strong;
- because much of the Money is already in.

- because there are less Money left;
- because traders/investors become CAUTIOUS.

You can chime in 100s of reasons why RSI divergence sell signals (DSS) proved such an 'excellent' choice among uber-bears for shorting the markets.

- SnP500 Part I: drive.google.com/...

There were also RSI-DSS in mid-1960s that collapsed Dow Jones and SnP500, including a major DSS from 1967 ATH to 1973 ATH that resulted into 1973/74 Severe Recession where SnP500 lost 48% and 45% for Dow Jones.

- the Big Picture: drive.google.com/...

1965 to 1974 turned out to be the first time only one (1) Lost Decade happened lasting only 9 years top to bottom --- instead of four (4) lost decades in early 1900s that include WWI + Great Depression + WWII; that bottomed out in 1942 when the USA started sending tens of millions of American soldiers to the Death Valleys of Europe in response to 1941 Pearl Harbor Attack (/to end all world wars once and for all).

But then:

RSI suddenly stopped producing DSS in 1996, worse still SnP500 kept rallying to new ATHs in early to late 1980s producing good! Good! and Great!!! momentum runs that super-squeezed the uber-bears. Worst still, the RSI-DSS of early 1989 to early 1990s resulted in more short-squeezes that finally broke the back of uber-bears resulting into massive FOMO induced Irrational Exuberance of 1996 to 2000 where SnP500 gained additional whopping 156% while Nasdaq went crazy with more than 400% gains in just 4 years.

- 1982-1987 DSS: drive.google.com/...
- 1996-2000 DSS: drive.google.com/...

- 2002-2007 DSS: drive.google.com/...

1982/87 and 1996/2000 were excellent small bear traps learned by expert traders during the massive vertical rallies of the 80s and 90s. But then it was practically a drought during the anemic 107% rally of 2002 to 2007 lasting 5 years, possibly the worst performing bull run in history, that resulted into a small DSS in October 2007 breaking the backbone of SnP500, the so-called last straw.


How about Now?

- SnP500 Part II: seekingalpha.com/...

RSI reached an All-Time-High in 1996, a massive momentum never seen before, not even during the massive 23 years of secular rally from 1942 to 1965 w/1967 ATH. Which in turn resulted into numerous BTFDs and short-squeezes each time minor divergence sell signal failed.

Unfortunately, like 1973, SnP500 produced a big-daddy RSI-DSS in 2007 supported by a baby DSS in October 2007 that resulted into excellent precision short setup for the contrarians. The rest was history very similar to 1973/74 Severe Recession and 1965/74 Lost Decade. Highly reliable history repeating itself almost exactly with 2008/09 Great Recession and 2000-2009 Lost Decade.


But then again, SnP500 again produced another RSI momentum run that short-squeezed the uber-bears multiple times using small divergence sell signals (bear traps) much like in late 1970s to early 1980s DSS'es. Small but painful short-squeezes.

- Strategic Plan A: drive.google.com/...

Well, we've got a new Good! Goodah! Great!!! pattern very similar to 1982 to 1987 that resulted into 38% collapse in October Black Swan. And also resulted into a collapse of SnP500 toward the monthly 50ma support very similar to October 1997, but with only 20.14% minor bear this time around.

- 1982-87 bull run: 251% gains, 26% CAGR, 173% P/Eexp;
- 2009/18 bull run: 330% gains, 17% CAGR, 27% P/Eexp.

Obviously, SnP500 was over-speeding in 1982-87 bull run with nosebleed P/E expansion of 173%. What would you expect to happen next?

- Fiscal Stimulus Plan B: drive.google.com/...
- the FOMO Runs: drive.google.com/...

Plan A became feasible in October 2011 during the EU Debt Crisis that became my primary roadmap that proved to be excellent performer.

Plan B probable only in late 2017 was unexpected but then again better to have an alternate plan rather than none. It complicates all my trading/investment strategies to no end, but is still a welcome sight despite all the headaches suffered these past few years.

For tutorial purposes only. Cheers and Good Luck.

- 1996-2000 DSS: drive.google.com/...

- SnP500 Part II: drive.google.com/...

sorry 'bout that/
One of the very important visual conditions for market to rebound after a steep selling off is that the 5 period DMA cutting into the zigzag price candles ..
Therefore, yesterday close or this morning were the moment to take actions if one wants to ride the rebound ..

Technically speaking on March 4,2020:
1)Yesterday market quickly sold off at close, technical reason was that the 5 period of DMA was not in place yet .. combined with the Monday huge up, yesterday's move was a process to let 5 period DMA construct a bottom or changing direction. Last night future ES development made this reading even clear .. that 5 period DMA was in its position for a direction change.
If this happens, it at least signifies a local bottom ( tradable bottom) for the current market ...
2) Next story is about 20 DMA, this DMA is pressing down.. market is rebounding and moving to meet this pressing down DMA, fighting will happen over there, 3200~3250 area.
If 20 DMA wins, market will have to construct W shape rebound, if current rebound succeeds , V shape rebound will happen.. Both sides have strong arguments !
Skip Kapur profile picture
Excellent insight Lance. You're one of the most thoughtful macro strategy writers on SA, or anywhere. Very easy to understand, and fact based.
2live4divs profile picture
good insight, thank you Lance , once again!
necto profile picture
I really hope that we are at a tipping point and the road is sideways or upward.
OMG what less than 20 deaths in the US. Well, look at this and nobody cares.

It is impossible to know how far this virus will go in the US. I highly doubt we are getting more than 50% of the truth. In fact, I think the "authorities" don't really know a whole lot of what to expect and are winging it day by day.

Like many viruses, they can be tempered with something as simple as baking soda, but don't ask your doctor. He makes no money when you go out and spend a buck on a box of BS that might actually work. Laugh all you want, but there are proven solutions to disease and sickness other than expensive and often useless Big Pharma drugs.

I expect another leg down, possibly to 250 (SPY) and even lower if things get too hairy. It is not the end of the bull market...yet. Just a herd of grey swans out for a worldly stroll. Throw in a Bernie Sanders nomination and the sell-off goes ballistic. Not to worry, before that happens, Hillary will barge through the convention doors to save the liberal party.

The Fed's actions are rather silly since the interbank interest rate environment is trying to increase rates to account for rising risks. The Fed will remain the repo man...it has no choice. Lowering rates will only exacerbate the boxed in position the Fed has created for itself.

If you have dry powder waiting to take advantage of a major blow-up, you are sitting good...if not, why ride the rails to disaster while being tarred and feathered?
BULLNOVA profile picture
Market looks like a double bottom to me.
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