In the last very short weekly four days, we saw a highly sprung nascent (dead cat) rebound. By a similar order of magnitude that manifested for the drop, the markets rebounded just as aggressively for the first time this year, to start April ever so bullishly. All these happened while the pandemic contagion continues to be ignored as global infections surpass 1.6 million. One could have been forgiven if one felt that conditions were back to normal somewhat.
So, the six million dollar question is this the start of a recovery? In my humble opinion, this is not, but the final warning of what is to come. And if we decide ourselves in excessive optimism, then we will pay in consequence. Such a strong statement requires evidence, and we explore herein via technicals on charts.
As usual, we start with the S&P500 E-mini futures, ES.
The weekly ES chart demonstrates a weekly strong rebound, the second in three weeks, of a matching magnitude to previous weeks. This is clearly the consequence of the volatility in the current market environment and people do start to get suckered in henceforth. The last week’s candle was significant as it managed to accomplished a couple of technical hurdles such as to close a weekly gap, breaking a downtrend by closing above the custom trail stop and closing the weekly candle in a bullish marubozu fashion, ignoring the previous week’s high tailed doji. Meanwhile, we can expect a challenge to the weekly 55EMA (orange line), which is similar to the 200 daily moving average. The MACD signals some support of the rebound but is clearly deep deep in bearish territory, giving us the first signal of “this is not the recovery”.
The bullishness since the end of March can be observed with the ES daily chart in the first extension rally after a short consolidation. It would be challenging the 55EMA early next week and may see some resistance. Meanwhile, a primary, secondary and final resistance level is set as possible expected turnaround points. The daily MACD just crossed into the bullish region, so spect to see some upside for the coming week.
A glimpse of our panel of leading indicators show sustained bullishness in volatile times. The massive drop in recent weeks in the high yield bonds now see a spectacular recovery. The small caps just closed the gap, indicating bullishness. The Value Line similarly. However, noted that the DJ Transports broke trend, but did not close the gap… yet. This might be a good one to watch.
Turning over to the other indicators, the USD clearly has been having a very volatile time in the last weeks. And this is reflected somewhat in the VIX, as it spiked to record high and then crashing down just as fast. Meanwhile, the Treasuries are still in a volatile bullish trend. But the clearest is Gold, resuming its upward rally stronger than ever, and most likely forcing a break on the bearish divergence.
The charts are telling of a slightly different story in recent weeks, one of a bullish version as opposed to the massive swift bear previously. While we would naturally like to party, I would be very very very wary of this massive dead cat bounce. There are way too many reasons why this is so, and it is very clear, at least to me, that this is not the V-shaped recovery some pundits are screaming about. While the global economy grounded to a halt by a viral contagion, the market is doing what it needs and wants to… and right now, it is most likely suckering many into the bear rally.
I’ll just leave you with one thought… the volatility is extremely high, and a bounce like that looks like a rally, but the ranges of volatility actually allows such breath of movement. And if that is so, then many would have been suckered in, and very few would know when to get out in time. More about this imminent Wave 2 in another story.
Meanwhile, stay safe…
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