Introduction
On Sunday night, the overnight futures stopped trading at $2,018 after dropping to the 5% limit. Now, the SPY (NYSEARCA:SPY) is looking for a new bottom below the first bottom of $286. The next support level is $277, but unfortunately, there are no support levels on the way down until price stops falling to identify where the buyers come in for the bargains.
The market is an efficient pricing mechanism and successfully matches supply and demand to determine price. That does not mean the price is efficient, especially in the short term. Rumors, fear, panic, greed and other factors can seriously distort price in the short term. However, in the long term, when the fundamentals become fully known and understood, the market price becomes efficient based on fundamental valuation. Value players and traders love inefficient market pricing and move in at the bottom, when blood is flowing, so to speak, in Wall Street. The current panic selling is creating a new opportunity for the bargain hunters and bottom fishers. They are usually too early in buying. Traders and robots don’t want to be too early and will wait for the signals to turn up before they buy.
SPY’s First Bottom Was Wrong
The SPY discounted the novel coronavirus impact at 15.8% by dropping from $339.1 to $285.5. You can see this in the daily SPY chart:
As you can see, the bargain hunters bounced it back up to $313.8, but after they were done, the SPY headed back down, reaching for $285.5. It did not make it, but found some buyers before the close on Friday and moved from a low of $290.2 to close higher at $297.5. However, on Sunday night, market futures dropped to 2,819 which means the SPY will be looking for a new bottom on Monday.
The daily chart is very “noisy” and therefore less useful for analysis. We will move on to the weekly and monthly chart for more reliable answers on the market as an efficient pricing mechanism. Before leaving the daily chart, we do want to look at the moving averages for price. These are reliable, market indicators and as you might guess, they are bearish.
The 20-day moving average has broken below the 50-day for strike one. The 50-day has changed from an uptrend to a downtrend for strike two. Price has broken below the 200-day moving average, and is staying below, for strike three. This bull market just struck out on the daily chart. The homerun for value investors and traders will occur when these signals start to reverse, and they will. I will wait for those signals before I go long the Index again.
SPY’s More Reliable Signals
Let’s turn to the weekly chart because it eliminates most of the crazy price swings in the daily chart. You can actually see the change in trends as a market turns from bullish to bearish. You can see where this has happened in the recent past. You can compare the start of this bearish move down to the start of the previous moves down. You can judge for yourself whether this is worse or better than the previous times.
Keep in mind that previous pullbacks may be due to more usual over-valuation and interest rate factors, while this one is completely different and caused by a coronavirus. Like the exogenous, 9-11 shock to the market, this too will pass and the market will return to its old high. The SPY is trying to figure out how long that will take and how low the market will go.
On the weekly chart, you can see the enormous drop in price compared to the first week in previous pullbacks. The volume is also the highest, confirming that this is a monster sell signal. In the very first week, the market is saying it has enough information to hit the SPY with a 15.8% drop, which is close to the 20% definition of a bear market.
Now, the market is watching the containment of the virus in China and the spread in the U.S. and other countries before it can determine how big the economic disruption is going to be. My guess is the bad news has not peaked in the U.S. and the rest of the world. I think as that happens, the SPY will be down 20% from the high and will be labeled a bear market. You can see that the 4-week and 10-week moving averages are trending down.
Monthly Chart Shows Support At $277
We can now move to the monthly chart which has the advantage of giving us the most reliable signals, but it sacrifices timeliness to do that. For more timely signals, we have to watch the weekly chart, as investors. The daytraders are using the daily chart to trade the daily swings in price, such as Friday’s surprise reversal.
Here is the monthly chart for those buy and hold, long-term investors, who think any bear market will be short-lived and there is no reason to sell:
This panoramic view of the market enables us to compare previous pullbacks in the SPY and how the signals helped identify the beginning and the end. At the bottom of the chart is the trigger signal and we have drawn vertical red lines to identify the change in signal. You can see it usually takes a couple of months to change direction. It is still headed down to that 50 line where it turned up last time. If it fails to make that turn, it will indicate to me that this bear market is much worse than the last one. The SPY will look for a lower bottom if this signal breaks down.
As you can see in the chart, the 50% retracement is at 277.2. Price support is at $276. We will find out this week whether these levels hold.
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