Stock Market: First Assess What Is Happening. Then Consider What Can Happen.

The low of Thursday could end up being the low for this pullback. But we do not know that yet. Yes, we did get a bounce from oversold levels on Friday which is encouraging yet not conclusive as to what happens next. The big move up on Friday on the SPX does give the impression it has some legs. So, perhaps some more to go on the upside.

I want to look at the probabilities using the SPX.

First, I want to start with a chart with drawings and levels.

The SPX was down last week. Price fell Monday from the lower shaded long rectangle area all the way down to 5504.65 as the lowest point reached on Thursday. Then the Friday up move took price all the way above the prior 3 days but not above the Monday high level. We did close above the Monday low.

So, Friday the move up I would characterize as not the best move up and not the worst move up either. We are in a situation where there is no clear direction or indication of what happens next.

When I say first consider what is happening, I mean do not consider what we think could happen. Just focus on what we see. And I see a big sharp pullback from the highs reached less than 4 weeks back. Within 4 weeks we have fallen -10% which is in reality quite a drop within a short period of time.

So, the reality is the trending is lower, weaker and bearish in the short term. Yes, we had and still are around oversold levels. But that does not mean we must go straight back up. We can make a lower high and then a lower low below the 5504 we touched Thursday.

In the chart I have drawn 2 shaded long rectangular shapes depicting the 2 areas where I see price to have potential resistance. The first area is 5674 - 5707 and the second area is 5833 - 5873. To simplify, let us consider these levels to be 5690 and 5850.

We also have the 200-day moving average at 5740 (bottom circle on yellow curve) and the 20-day moving average at 5857 (top circle on red curve).

I also have drawn a steep trendline that attempts to connect some important points along the way the price has fallen over the last 4 weeks. As long as the price stays to the left of that trendline, we can consider that we are still in a downturn.

Near Future Price Scenarios

Now, we can identify the future price scenarios which is to assess what could happen. We can also assign probabilities to these scenarios.

There are 3 price scenarios that I see.

A completely failed bounce: This is depicted as 1 in the picture above. Basically, this one shows the price just dropping from current levels and making new lower low. This would indicate that we have gone lower, and the oversold situation continues to become more oversold. Of course, we will stop going lower at some point and try to reverse again. Note that during the COVID drop we went straight down about -35% on the SPX. So, we cannot rule out a continuation of the straight drop. I give this scenario a low probability of 10%.

Failed Attempt to bounce: This is depicted as 2 in the picture above. This scenario indicates that price goes up a bit, hits those resistance levels above and reverses back down to make new lows. So, traders have an opportunity to trade to the upside for about +2 to +5% above current levels (the opportunity) before we reverse back down. To me, at this time, this scenario has the highest probability. I give this a 60% chance.

Price Reverses: This is depicted as 3 in the picture above. In this scenario, price goes up at first, hits one of the resistance levels, reverses to make a higher low and then reverses again to go back up. I do not show yet that price makes new highs above what we did in February. The momentum in this scenario could take it there though. This is the best scenario for the bulls. I give this scenario a probability of 30%.

Not everyone will agree with my assigned probabilities. That is fine because there is a “gut feel” element to that exercise. For very experienced technicians the gut feel is well informed and usually good. I consider myself mid. So, feel free to assign your own probabilities. I do think those are the 3 scenarios though for now.

Review of Weekly Chart

Another aspect to consider is that we have been down now for 4 weeks in a row. Does the law of averages say we have an up week now? Maybe. The question is not just about next week though. We are trying to see how far ahead we can place probabilities.

Let’s take a look at the weekly chart of SPX.

I have highlighted the 6 areas of interest over the last 4 years when we have had several weeks of price decline. We can see the worst in these last 4 years is when we had 7 straight down weeks (area of interest 2). Then price went up a little, fell to make a higher low, and then went on to make higher lows and higher highs for a good amount of time.

Area of interest 5 shows that we went down 4 straight weeks and then went back up all the way to new highs. This turnaround is well identified as the Aug 5, 2024, low.

Then if you look at area 1, we see that price was down a few weeks, then up a week or two, then down again a few weeks, and so on. Mostly, during that period, we ended up down finally making a reversal in area 2.

So, the net of it is that bottoms can be a process and that is actually the right thing to expect. The Aug 5, 2024, type reversal as shown in area 5 is rare.

We are again in a situation of 4 straight weeks down (area 6). If you observe the last candle which is the last week, the bulls actually tried to reverse for the week but could not muster enough strength to do so. While that is not strong enough, it is also not a very weak attempt given the shape of the candle.

That is why I give a probability of 90% that next week will be green. But after next week what we do will very much depend on the price momentum we see. That is all I can project out for now.

What is Actually Cooking

The US stock markets being weak does not mean nothing is working. Precious metals and international equities are having a good run.

FXI

The China large cap ETF FXI has been slowly and surely taking out resistance levels. The latest one is a long-term descending trendline from 4 years back. If you look for the 200-day moving average (yellow trendline) you will see the nice price trending over a long period first below and now above that.

GDX

Precious metals and related have been on a run. I picked the GDX daily chart to show the long-term trending.

I do like that bottoming pattern on the long-term chart. And also, we have a breakout from a short-term trendline. Overall lot to like.

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That’s all for today. Have a great week ahead.