By Tom Gentile
Dear Red Alert Reader,
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 this past 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 jump in markets was exciting, sure, especially after so many days of red in a row. But the “stimulus overdose” may not last…
Instead, hedge funds and money managers are getting a second chance to “rebalance” their portfolios by cutting risk. And if that happens, then the week of upward movement was simply a swapping of securities from institutions to the retail public.
Let’s take a look at what this might look like – and what’s possibly to come…
The Channels
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 (SPY) are 266, 280, and 295.
Implied Volatility
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!
To your success,
Tom Gentile
America's #1 Pattern Trader
