The recent “melt-up” in the US stock market after a moderate downside price move in early May has set up a number of technical patterns that traders need to pay attention to. This melt-up trend may continue for a bit longer, but price levels and actions are beginning to clearly point to potential weakness in the future.
First, no matter how we attempt to spin the data, the US economy is very likely to fall into a moderate recession after the COVID-19 pandemic has had repercussions for the entire global economy. The recent riots and protests all across the US continue to disrupt and destroy property, businesses, and other assets.
It is almost like a "one-two-three" series of punches leading to a total knock-out. We have the virus, the stay-at-home orders, and now, the riots and protests. Recently, the National Guard has been called out to join local law enforcement. From our perspective, the situation is very far away from stable economic activity/growth supporting current stock-price activity/levels.
We have been urging our friends and followers to be very cautious of long-side trades and to execute them with very narrow parameters, minor position sizes, and easy/tight targets and stops. The reason for this is because we are not confident that the underlying global economic fundamentals support the current price trends and activities. Yes, the US Fed is pouring trillions into the economy in an attempt to support the US and global markets. But the view from the ground level is very different from that from the Wall Street office on the 20th floor.
The GDP-Based Recession Indicator Index has risen to its highest levels since Q1 2008, based on April 2020 data. If it rises further in May, we’ll have more evidence that the US economy has entered the early stages of an economic recession. Remember, in early 2008, the US stock market had already begun to collapse more than 20% from recent highs. Currently, the S&P 500 is trading only 9.63% below its all-time highs. Our researchers continue to believe the US stock market is overvalued by at least 11-15% at current levels.
GDP-Based Recession Indicator Index
We continue to urge technical traders to be very cautious of the potential “washout-high” price pattern that is forming and we continue to urge our followers to be very selective of active long trades. There is money to be made in this trend and certain sectors and symbols have rallied 10 to 15% over the past 4+ weeks – but technical traders need to be very aware of the active risks still playing out in the markets.
This daily chart of the Dow Jones E-mini future (YM), highlights the major resistance levels near current price highs. The first, the MAGENTA line originates from our Adaptive Fibonacci Price Modeling system and is a key target/price level originating from the all-time price peak level. The reason this level is so important is that it continues to reflect the prominent downside price move/trend and this key Fibonacci level is still active until it is breached by price moving/closing above this level.
Second, the current Adaptive Fibonacci Price modeling system trigger level is highlighted in YELLOW. This level is going to act as a “trigger point” in price. If price rallies above this level and closes above this level, then we may see more upward price activity over the next few days/weeks. If price fails to close above this level and stays below this level, then we interpret this as a failure to achieve the trigger level and it would suggest that price may begin to move downward – away from this critical price-trigger level.
Watch for the YM to move to levels near or above 25,600 and watch how it reacts to this key resistance level. If it rallies above this level then fails and begins to move dramatically lower – this level is being rejected and a new bearish trend may setup. If it moves above this level and closes above this level, then we have confirmation of a potential upside price trend and bullish trending may continue for a bit longer.
DOW JONES E-MINI FUTURES DAILY CHART
This next weekly chart, the Russell 2000 ETF (IWM), highlights another key technical pattern – a gap fill. We’ve been watching how capital has transitioned from the NASDAQ and S&P500 and into the mid-caps and other sectors over the past 4+ weeks. Once the major indexes began to reach levels near the past all-time highs, capital began seeking out undervalued sectors and technical traders began rotating into these sectors expecting a moderate price rally to occur.
Now that the Russell 2000 has rallied up to fill this gap, it is very likely that some level of moderate price weakness will setup – possibly pushing price levels lower. A gap fill is a technical pattern that suggests any gap in price will eventually get filled by future price activity. Once this gap is filled, the price has completed a technical pattern to “fill the void”, leaving the price usually to stall and move in the opposite direction for a period of time – establishing a base for a new momentum move.
We believe the filling of the gap on this IWM chart suggests the mid-caps may have reached a key resistance level and may begin to move downward in the near future – likely attempting to establish a new momentum base near the $122 level.
IWM – ISHARES RUSSELL 2000 ETF WEEKLY CHART
We love this market volatility and how various sectors are rotating right now. It presents incredible opportunities to be able to select new trades. We are still being very cautious overall with our portfolio. We’ve been able to achieve new highs in our accounts by selectively trading various symbols and targeting exit points using our proprietary trading technology. Right now, we have two active trades that continue to generate solid profits. No reason to go crazy trying to pick dozens of trades with our “Best Asset Now” modeling system. It allows us to attempt to stay active while trading the best asset class in the markets.
Watch how the markets react this week and early next week. We recently posted a research article about the US presidential cycle and how June/July are often very difficult months in an election year. You may find this piece helpful as we push forward into the summer months of this 2020 election year.