EB Daily Market Report - Friday, March 27, 2020
Note
I will be unavailable much of the day today, so I'm providing a brief DMR early this morning to give you a couple technical ideas to ponder.
Executive Market Summary
- Futures are pointing to a lower open this morning; Dow Jones futures have been volatile, but currently look to open down 3% or so
- Crude oil ($WTIC) is down 3.54% to $21.80 per barrel; the low close on March 18th was $20.83 per barrel
- The 10 year treasury yield ($TNX) is down 6 basis points to 0.75%
- The U.S. Dollar Index ($USD) has fallen 4% in the past week after soaring the two weeks prior
- Given that dollar drop, gold ($GOLD) has been rallying; however, it's lower by $22 per ounce today (-1.3%)
- Yesterday's strength was led by utilities (XLU), real estate (XLRE), and healthcare (XLV) - the market is turning more defensive, a short-term warning sign
- We have no active trade alerts at this time
Market Outlook
I've compared the 2020 bear market drop to 2008 and 1987, but generally on daily charts. Let's look at the S&P 500 in 2020 and 2008 using hourly charts:
2008:
Here are a few key takeaways:
(1) Pay attention to the 38.2% and 50.0% Fibonacci retracement levels. Be especially mindful of reversing candles anywhere near those levels
(2) Price resistance in 2008 was tested as the VIX fell initially to 55 or so, then down to 45
(3) Subsequent rallies were unable to clear the initial rally and reaction high
(4) Red-dotted vertical lines mark the hourly PPO turning negative, which generally led to further impulsive selling
(5) Hourly PPO did turn positive on a few occasions, but the 1-2 level marked short-term momentum highs
2020:
2008 does not guarantee that 2020 will behave in the same manner. For one, 2020 is likely still a part of a secular bull market. 2008 was clearly the last leg down in a secular bear market. In other words, the long-term benefit of the doubt, in my mind, goes to the bulls. However, ignoring the extremely high VIX level at this time would be financially irresponsible. Generally, we don't see "V-shaped" bottoms. It's much more normal to see a retest and double bottom form. There is still plenty of uncertainty left for the bears to feast on. I believe much of the current rally has been financial firms finally putting their capital to work. Then we've seen short sellers squeezed. Looking ahead, it would not be all that unusual to see prices begin to roll back over from key levels of price, gap and Fibonacci retracement levels marked above.
Be careful.
Trading Ideas
In recent days I've been providing trading ideas from a long perspective. Let's switch to a short position. Many of those companies that were being trounced throughout March had potential "going concern" issues. That's an accounting term meaning that a company may not be able to meet its obligations without financial help in some form. While the U.S. government has announced a stimulus package designed to help both potential failing businesses and workers, it can't cover all the future uncertainties. For instance, you might bail out airlines, but what if the virus remains a concern for an extended period of time. Will consumers jump right back on airplanes? Those types of questions cannot be answered right now because we don't have all the information. So another leg down in this group, in particular, would make sense to me. Here are the two highest SCTR scores among large cap airline stocks and the current look of their charts:
LUV (SCTR score - 44):
LUV has been one of the best airline stocks, but it's still in disarray technically. Hitting the Fibonacci 50.0% retracement level and failing is quite ominous.
AAL (SCTR score - 14):
AAL has been much weaker than LUV, which tells us something. If airlines ultimately do begin uptrending, I'd rather own LUV as its accumulation distribution is much stronger currently. And if the group rolls over, I'd look for AAL to take a steeper fall.
There are still plenty of scenarios as to how all of this might eventually play out. Maybe we do see a V-bottom. Or maybe the next leg of selling is upon us with lower futures this morning. The one thing I can say with certainty, though, is based upon history, short-term risks on the long side have increased dramatically as a result of the last three days' surge.
Happy trading!
Tom