For the past four Sundays, my technical work has been focused on the extent of the post-Christmas recovery rally in the S&P 500 (SPX) in relation to the September-December 2018 correction from the Sept. 21 all-time high at 2940.91 to the Dec. 26 low at 2346.58.
Since mid-February, when the SPX climbed and sustained above the 62% Fibonacci retracement zone at 2713.70 (+1% target overshoot at 2740.84), I have been refocused on the next higher 76.4% Fib resistance level at 2803.50 (+1% target overshoot at 2832). Purely from a Fibonacci perspective, the 2803.50 to 2832 zone on the SPX represented the next natural resistance zone from where the recovery rally might exhaust itself.
In each of last week's first four sessions from Monday through Thursday, the SPX closed above 2832, with the highest close registering 2854.88 on Thursday—just hours after a much more dovish than expected FOMC policy statement. However, on Friday, the SPX gapped down and proceeded to close the day and the week at 2800.71, a full 1% beneath the upper boundary of the 76.4% Fibonacci recovery resistance ZONE, as well as below 2803.50, the actual 76.4% recovery coordinate of the entire Sep-Dec correction.
Apart from whether or not Friday’s weakness was precipitated by growing fears of recession triggered by an increasingly dovish Powell, a plunge in longer-term Treasury yield, angst about the implications of an inverted Yield Curve, or perhaps anticipation of a weekend release of the Mueller Report, the 76.4% the Fibonacci resistance zone remains intact as we start a new week of trading -- albeit after an upside overshoot of 2% (2803.50 to 2860.31).
Furthermore, I would be remiss if I did not mention that Friday’s downside reversal came within two sessions of the Spring Equinox, exactly 6 months after all-time new highs were established on the day after the Fall Equinox (Sep 21, 2018).
The confluence and influence of seasonal change, an important Fibonacci technical level, overbought sentiment readings, and the negative reaction to the latest Fed policy pronouncements combine to exert potentially powerful headwinds against the near-term continuation of the 3-month 22% SPX advance.
That said, those headwinds were being challenged right out of the blocks at Sunday night's futures reopen. According to Attorney General William Barr, the Mueller Report has found no evidence of Trump campaign collusion with Russia, and leaves to AG Barr the determination of whether the President obstructed justice. Mueller’s report does not conclude that the President committed a crime, but it also does not exonerate him.
On its face, the lack of a crime is good news for POTUS, and likely will be considered as such by the algo programs on Sunday’s reopen of e-Mini Equity Futures. Initially, shorts will have reason to cover, and bulls will have reason to enter new long positions.
However, after the initial algo knee-jerk reaction, we will have to see if gains are sustained in relation to last week’s highs and the 76.4% Fibonacci resistance zone. If last week’s highs remain intact, or sellers emerge after the initial knee-jerk upside reaction to the Mueller Report, then perhaps traders and investors are becoming increasingly concerned by the divergent fundamental message of the bond market -- precipitously falling yields in anticipation of much weaker-than-expected U.S. and global economic growth.
For our purposes heading into Monday's trading session, all eyes should be on Friday’s high of 2866 in the ES (June e-Mini Futures) -- and Thursday's high of 2860.31 in the SPX -- with key support at 2800, the rising trendline off the Dec 26 low.
