A Bull Market and the Bear – Dow and S&P 500 Technical Analysis Part 4

A Bull Market and the Bear – Dow and S&P 500 Technical Analysis Part 4

Originally published on Jan. 25, 2021 by TraderStef at CrushTheStreet

One year ago, I published the “Dow and S&P 500 Technical Analysis Part 3” and opined with the following paragraph:

“Last evening at around the stroke of midnight EST, an article appeared in the Asian mainstream financial media that raised pertinent questions about the virulence and severity of the current SARS 2.0 coronavirus (SARSCoV2) outbreak. The futures for U.S. stock indices began rolling over on those headlines and continued throughout the U.S. trading day… It appears that Goldilocks has stepped behind the curtain with her N95 facemask after reading the Forbes magazine article that called the coronavirus outbreak a “black swan” last Monday, and the bear is ready for the limelight.” – TraderStef, Jan. 31, 2020

It was definitely a black swan experience as high-frequency trading (HFT) kicked in after machine-learning algorithms digested a new pandemic vocabulary and a brutal plunge in the market commenced. The Dow nose-dived -38.5% and the S&P 500 plummeted -35.5% to their final lows on Mar. 23, 2020. The world was officially in the midst of a deadly outbreak due to a novel virus, as countries imposed severe travel restrictions and societal and economic hard lockdowns on an incremental basis through late February, March, and April. The New York Stock Exchange did not escape the virus’s wrath as floor traders and staff tested positive to the coronavirus and the NYSE switched to full electronic trading on Mar. 23. That was the first time in history that the physical trading floor of the “Big Board” had ever closed and gave automated platforms free rein.

Less than one week had passed since the Federal Reserve announced a zero-interest rate policy (ZIRP) and injected billions in liquidity for open market operations. That was not enough to assuage the pandemic fear and automated carnage. On Mar. 23, the Fed pulled out a bazooka with unprecedented monetary policy measures that launched multiple credit facilities to backstop businesses, and massive purchases of treasuries, bonds, and mortgage backed securities “to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.”  On Mar. 27, President Trump signed into law the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act to help blunt the economic impact. The rest is history.

We are now into late Jan. 2021 and the virus has mutated into a more contagious strain (Twitter thread). The financial markets may be functioning smoothly and stock markets are near all-time highs, but the socioeconomic metrics are growing into a larger train wreck than the Great Financial Crisis or a pandemic black swan, as the U.S. stumbles into the void of “The New Great Depression.”

“DC will stay under military occupation while the opposition leader is put on trial.” – Jack Possobiec

The new Biden administration taking power has created an upside kneejerk reaction in stock indices, but a different reality show is slowly sinking in despite the prospect of a multi-trillion CARES Act II on the table that is full of socialist free stuff. There is a barrage of Executive Orders being signed, promises of draconian policy reversals, geopolitical upheavals, green environment handouts, higher taxes, an immigration blowout, and destruction of energy independence that was one of the Trump administration’s greatest accomplishments. There is also background noise that a dual-government is in play and they’re jockeying for control over the U.S. political machine in wake of a hotly contested presidential election that was riddled with fraud. The military awaits its role on the sideline as closure for the election remains unresolved for tens of millions of Americans on multiple sides of an ideological chasm.

Statement from the Office of the Former President - Jan. 25, 2021
  • National Guard in D.C. Through March for Trump Impeachment Trial – The Hill
  • 8 states recall National Guard from D.C. after demeaning treatment – Daily Mail UK
  • SCOTUS John Roberts Won’t Preside Over Impeachment, Unconstitutional – WashTimes
  • Shades Of 1999 As “Market Mania” Returns In 2020 – Advisor Perspectives
  • Billionaire Carl Icahn says he’s well hedged for a ‘painful correction’ – MarketWatch
  • The Hazards of Asset Allocation in a Late-stage Major Bubble – GMO
  • Bubbles of epic proportions fun to trade, but eventually they pop – David Rosenberg
  • This Is Starting to Get to Dangerous Levels – Mohamed El-Erian
  • Margin Debt and the Market, Another Record High – Advisor Perspectives
  • Biden Kills Thousands of Jobs on His First Day in Office – True Pundit
  • Biden destroys jobs, raises energy costs, radical environmental policies – Fox News
  • Charlie Munger warns of lost decade for investing (2021-2031) – Caltech
  • Stocks Will Fall at Least 30% in a Drawn-Out Bear Market – David Tice
  • Biden Pledges to End Trump Tax Cuts – Mitch Roschelle
  • Biden Tax Policy Will ‘Absolutely’ Drive Business Out of US – Grover Norquist
  • If It Looks Like a Bubble and Swims Like a Bubble – WSJ
  • We Are on the Brink of a Terrible Civil War – Ray Dalio
Revolutionary Anarchy in the USA

Let’s move on to a technical analysis of the Dow and S&P 500. To view a larger version of either chart below, right-click on it and choose your “view image” option.

Insider selling at record highs…

Markets Insider Selling All Time High Jan. 2021

Margin debt at record highs…

Excerpt from the Jan. 31, 2020 chart analysis:

“Most of the studies and indicators quickly turned bearish in just under two weeks due to global pandemic fears, which threatens a fragile global economy supported by fiat monetary accommodation from central banks around the world… My expectation for the price action going forward with the Dow and S&P is more bearish than noted on Jan. 15 with further losses on the table. There will be bouts of extreme volatility. Both indices are ripe for downside Scalping opportunities by seasoned traders. This is a good time for passive investors to have a money-market account in place and transfer the most vulnerable portion of a portfolio into cash, which will conserve capital gains while waiting for the correction to probe a bottom.”

$DJIA Dow Jones Industrial Average weekly chart Jan. 25, 2021 at 5:15pm EST…

The Inverse Head ‘n Shoulders continuation pattern that developed through 2018-2019, confirmed with a price breakout from its neckline and printed an all-time high of 29,569 in Feb. 2020. That price point is an anchor for drawing the Fibonacci  retracement levels down to the Mar. 2020 low and upside Fibonacci extensions.

What followed was a domestic policy train wreck that destroyed Trump’s economic recovery efforts and plugged holes in the Titanic with unprecedented fiat that has nearly doubled the Fed’s balance sheet to almost $8 trillion, and trillions more in Congressional fiscal spending that rocketed our National Debt near an unpayable $28 trillion. Funny money and a search for yield has resulted in an all-time high of 31,272 last week in the current Up Channel.

Last week’s candlestick printed a bearish Plunger (similar to a Shooting Star), but we must wait for this week’s candle to finalize in order to confirm any near-term trend. The StochRSI is in overbought territory and shows the first sign of a potential rollover. The DMI-ADX is positive but indecisive. Volumes are not telegraphing anything specific. The 50 Exponential Moving Average (EMA) is at 28,120 in an upward trajectory. The nearest level of support is the 0% Fibonacci and 28,900 lateral. The price action closed at 30,960 this afternoon.

$SPX S&P 500 weekly chart Jan. 25, 2021 at 5:15pm EST…

The S&P 500 is nearly identical but slightly more bullish than the Dow, although I’m not convinced that either are a screaming buy at this time.

Keep eyes on the lower trendline drawn up from the Mar. 2020 low on both charts, as that line is a likely bellwether for any near-term weakness. Do not be shy about taking some profit off the table from any long in the tooth positions if support lines begin to buckle with large sell volume prints. I rarely make a call that draws more on the fundamental case rather than technical, but this is one of those moments. This is not the time to layer-in capital or long-term positions. I suggest sticking with brief scalping opportunities in either direction until the short and narrow Up Channel on both charts break up or down.

UPDATE Jan. 27: Today the Dow plunged -634 points, S&P 500 -98.85, NASDAQ -377.5, and the Russell 2000 -41.16.

Jim Rickards Interview on the New Great Depression – Rainman’s Take

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