Despite today’s DEAD CAT BOUNCE, and Trump's promises that the “virus is over.” Nothing in "words" has changed with COVAT 19. The charts are the ultimate truth since reality is beyond all illusions. Words only take us to a certain point, after which it's only the technical charts that reveal it.
The latest survey from the American Association of Individual Investors also had some conflicting results. The Bullish% rose 1.3 percentage-points to 34.2%, which is below the historical average of 38%, but just slightly. In contrast, the Bearish% was down 2.3 percentage-points to 49.7% which is well above its historical average of 30.5%. This means that only 16.0% of individual investors were neutral, an unusually small amount, given the historical average of 31.5%.
For example, on August 8 when the Bearish% was also relatively high at 48.2%, the Bullish% was expectedly low at 21.7%, and 30.2% were neutral. That is the more normal relationship, when bearish sentiment is high. Given the market weakness and uncertainty over the economy as well as earnings, the Bullish% should typically be at 25% or lower.
Two ways to interpret the sentiment divergences are to expect a sharp drop in the Bullish% as the market declines even further. Alternatively, one could conclude that the bear market rally is not over yet. That possibility is consistent with my analysis of past bear market rallies, which suggests that these rallies can have several phases that help to reassure investors prior to another decline.
The weekly chart of the Spyder Trust (SPY) shows that the ranges did narrow last week as the high was just below the 38.2% retracement resistance at $263.66. If this level is overcome, the 50% resistance at $277.68 is the next key level to watch. Last’s weeks low at $243.90 now represents good support. A drop below that level will suggest a move down towards the March 23 low.
The weekly S&P 500 Advance/Decline line dropped below its weighted moving average (WMA) on February 28 and declined further this week. There is next support at the September high (line b), and if this level is violated, there is additional support at the July high (line c). The monthly A/D line (not shown) is declining, but still above its WMA, as it has been since the spring of 2016.
Looking at the daily chart of the Nasdaq 100-tracking Invesco QQQ Trust (QQQ), we can see that it formed a doji at the March 23 low (point 1). A buy signal was triggered the following day. The rebound high Tuesday at $195.25 (point 2) was above the 38.2% retracement resistance level at $192.64. This makes the next potential rally target at $201.20, which is the 50% resistance level. The daily Nasdaq 100 A/D line closed the week back below its WMA after several failed rally attempts. A move above its resistance (line a) will signal a further rally. A decline in the A/D line below the March lows would likely lead prices lower.
The US stock market is closed on this upcoming Friday. With the shortened week, Monday’s close may set the stage for the rest of the week. The economic calendar is fairly light this week, with FOMC minutes coming out Wednesday, as well as the PPI and CPI numbers coming out towards the end of the week. Most interesting will be the mid-month reading on Consumer Sentiment and the latest jobless claims on Thursday.
There are no signs yet that the market has formed a sustainable bottom. However, even in this carnage, there are several stocks that are bucking the market’s overall downtrend. For example, these five stocks in the Dow Jones Industrial Average all closed the week up more than 8%. When the market does bottom, they may be among the new market leaders.
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