Weekend Stock Market Analysis: What Now After the Pump?

The basic alternatives are this:

  1. The lows are in and we’ve entered a new, long-term bullish structure
  2. The lows are not in and we will revisit them

Early in the week, I suggested that—at least temporarily—the lows could very well be in, and so far that’s played out. And during the course of the pump, I discussed my reluctance to look for the pump’s conclusion (here) and I also discussed the bullish potential it had (here) and so far, that’s all been not entirely misguided.

But, we also still face something of a contradiction here:

  1. On the one hand, we have lots of data points suggesting to me that we aren’t strongly likely to be in a long bear market: we have had no yield curve inversion (and even if we had, these often precede recessions and bear markets, and often by quite some time), sentiment is very bearish, etc., etc.
  2. But we also haven’t really seen a good capitulatory low (volume spike on the e-mini S&P futures contracts, $VIX spike, equity put-to-call ratio surge).

This leads me to remain open to a retest of the lows, though I will also accept no retest, as this rally really is quite impressive and could indicate to us a change in trend.

All that taken as a given, let’s look at some charts.


The Bullish Outcome

In the most basic sense, we’ve had a strong bullish wedge breakout:

ES

If this were to keep going, I would expect the targets of the bullish count to help to guide us. Were such a powerful rally to continue, I would expect us to be in the third (minor [green]) wave of the third (intermediate [orange]) wave. If this is so, we would expect to continue the ascent for green 3, consolidate, make a new high for green 5, consolidate, and make yet another new high for orange 5. That is to say, it should be “up and to the right” for perhaps at least a few more weeks, though perhaps at a slower pace than what we saw this week. So, if we don’t fall from here, that’s roughly what I will be expecting.

ES

However, there is still hope for the bears here.


The Bearish Outcome

Despite the strong bullish wedge breakout, there are lots of technicals here that might serve as terrific resistance.

This week I focused my attention on the “parallel rails” and we’ve poked through that now. However, those “parallel rails” pointed “up and to the right.” We now actually face a new set of “parallel rails,” namely a set that faces “down and to the right” (particularly on the cash sessions) to the tick:

SPY

Furthermore, if we draw a channel from the COVID crash low through the 1/24 low, we came right back to retest it into the close, also to the tick:

SPY

That’s two points of resistance, but there are others (the 200-day SMA, for instance).

The Dow futures did the exact same thing (channel retest from beneath, using the same lows to build the channel—COVID and 1/24):

YM

And $QQQ came almost to its respective version of that same channel, but also now faces the combined forces of both its 250-day EMA and its 60-day EMA (green & red EMAs, respectively) right at that same channel:

QQQ

And finally, $RTY has only managed to reach the lower bound of the range it was in for over a year and from which it fell this year:

RTY

And so at least in the short-term, I will not be surprised to see many of these serve as overhead resistance, particularly because we’re at all of them all at the same time.

It would take huge news (peace in Europe?) to get through these all at once. Without that, I’m skeptical.


Volatility

I want to make two simple observations on volatility.

The $VIX has arrived at one of its fan lines (purple) from above, and that may serve as support:

VIX

Similarly, $VVIX has arrived at a long-term upward-sloping trend line, and that may serve as support:

VVIX

And finally, while many of the bull wedges on some of the indices (and many sector ETFs) look strong and persuasive, $AAPL’s is weak sauce (so far). It’s barely poked out and is at its 60-day EMA from beneath. If the indices all face resistance here (noted above) and Apple pulls back with them as a result, this will produce a failed breakout of this bull wedge (red structure) and would honestly give it a pretty shitty look. A failed breakout here, opens the door again for a revisit of the other end of the wedge, or, at a minimum, a grind along the upper rail.

AAPL

In sum, if we keep going up, I can explain it and have some targets grounded in the bull count discussed toward the beginning of the article.

However, given many of these technical observations, I see so much resistance here on so many instruments, that I am a bit more inclined here toward the view that the rally may fail.


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