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The only thing able to push the markets above water since the coronavirus took hold of the globe has been the $2 trillion stimulus package.
It's the largest economic stimulus in history, and its Senate passage last Wednesday handed the markets a 10% pop after hitting lows not seen since 2016.
Before the bill, the government lowered interest rates to zero, pumped U.S. dollars in to boost liquidity, and started repurchasing bonds - but nothing pushed the markets upward like the stimulus bill, designed to help both businesses and individuals cope with the effects of the coronavirus.
The three-day jump in markets was exciting, sure, especially after so many days of red in a row. But the "stimulus overdose" did not last. On Friday, the market's three-day rally ended on news that the United States now led the world with the highest number of coronavirus cases.
Then Monday, the Dow rallied over 600 points - about 3% - on a few "good" news items, like Johnson & Johnson (NYSE: JNJ) announcing that it has identified a lead coronavirus vaccine candidate and Italy reporting its lowest number of new cases in almost two weeks.
However, this sentiment isn't sticking, with the Dow down Tuesday.
Instead, hedge funds and money managers got a second chance to "rebalance" their portfolios by cutting risk. The week of upward movement was simply a swapping of securities from institutions to the retail public.
The up-and-down leaves us with the question of when we hit market bottom. Everyone has their strategy to figure out how to tell - and these are the three indicators I'm glued to...
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Channels reveal themselves when highs and lows are drawn together to represent rising or falling support and resistance.
Right now, this channel trading chart shows a rally off the crash - but this will run into resistance shortly at the 255 and 275 levels.
The Fibonacci Retracements
Some people think Leonardo Fibonacci was a mathematician whose only contribution to the world was a series of sequences that most people have no clue how to use. Others think he is a genius, as everything that we know and see has the Fibonacci sequence built into it.
As far as the markets are concerned, the numbers 38, 50, and 62 are three big retracement numbers that all traders should pay attention to. During a rally or drop, these percentages are important, as countertrends happen.
Looking at the recent drop, the countertrend resistance levels on the SPDR S&P 500 ETF Trust (NYSEArca: SPY) are 266, 280, and 295.
This chart shows options traders' purchases reflected in the percentage of market moves going forward. The low earlier this year is represented in efficient markets, and options trading was at relatively low premiums. The recent highs, however, suggested that options were trading at eight times the low levels (suggesting eight times the movement of the markets - which we have gotten).
Current levels suggest that the market movement we have seen in the past is not over. Expect the overall markets to continue their wild swings over the next few months - and be prepared to take action.
Based on the charts above, we could see markets pull back once again. I'm talking under 18,000 on the Dow Jones Industrial Average, 2,000 on the S&P 500, and 6,000 on the NASDAQ.
To determine a bottom, we can look at the third chart.
If it starts to drop, then we can expect the selling to finally leave the markets - and we can look to go up from there!
In the meantime, be sure to watch my crisis response webinar on how to trade amid the COVID-19 crisis...
You see, I rarely open the doors to my command center... but today, I'm granting virtual access to explain exactly how the markets have been impacted by the COVID-19 pandemic.
I'm going to dig into the market's most crucial areas: stocks, bonds, the dollar, gold, oil... and show you where each sector stands - and where they're headed next. Tune in right here...
About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.