Flirting with W’s

Last week volatility returned as markets took a turn south.

It’s difficult to discern just what caused the move. From a purely standard deviation basis the markets looked over-bought. But this is rarely a reason in and of itself to get markets to pull back.

Civil unrest? Maybe. Spike in Covid-19 cases raising concerns of shutdown 2.0? Maybe. Jerome Powell’s talk on future Fed policy? Maybe. Permanent job losses and higher long-term unemploymenet? Maybe. Over-ambitious estimates of 2021 economic growth? Maybe.

Pick what you’d like, whatever it was, the markets peaked Monday then went on an aggressive 4-day slide ending the 3-week positive streak.

The spike in volatility may bring technical analysis back into vogue temporarily as markets seek to find support.

Based on the last several weeks, support looks to be showing up in a few key areas: 2944.99 / 2903.24 / 2860.95

The 100 dma is at 2944.99, the 50 dma is at 2903.24, and the slightly more controversial low in the 4-week pattern for the 21-malg is at 2860.95. The malg (moving average linear regression) actually printed back in April. So we’re talking about a pretty aggressive slide to give up all of May and June’s gains to roll back that far.

Resistance isn’t really worth discussing right now. The discussion is about whether or not the markets will find a footing. And there are a lot of variables the markets are trying to price in right now. Pricing in structural changes to the economy can be tricky.

Last week definitely put a damper on momentum too. The BigFoot database seems to have stabilized as the trend of weekly additional buy signals flattened last week, showing no significant change from the prior week. This is an indication that momentum has flattened or turned negative.

The other macro economic indicators in the BigFoot system remain unchanged at this time.

For the week, look for volatility to remain high with pressure to the downside. This may be part of the “w” that many have called for during this recovery. Pricing has arguably been pretty high based on valuations and future earnings projections for a lot of large-cap stocks. A pull-back from these would not be out of character. The larger question is how long does the pull-back last, and how deep does it go? If this trend plays out anything like it has for the past few months, it could be a fairly quick and violent move with a similarly paced resolution.

If futures are any indications, we will see a quick drop at the open on Monday. How the rest of the week follows through will the interesting. Technical indications suggest we’ll see downward pressure most of the week, or until the SPX hits at least 2950 or so.

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