SPX 61.8% Fib Test & Rising WedgeThe S&P 500(SPX) closed Friday at $2929.81 for a +$48.61(+1.69%) gain. Price closed right at the 61.8% Fibonacci retracement level which is where price peaked on April 29th(red arrow) before seeing a slight pullback to the 50% Fibonacci level. The 50% Fibonacci level is the midpoint of the total Fib range from the all-time high of $3,393.52 made in February to the coronavirus selloff low of $2,191.86 made in March. Price trending above the 50% Fib level indicates a bullish trend in price while trending below the 50% level indicates a bearish trend in price. A strong bull trend would require price to be trending above the 61.8% level while a strong bear trend would need price to be below the 38.2% level. Price has already been rejected from the 61.8% level once on this relief rally so testing this level again will be significant going in to next week. A move above the 61.8% level would be considered bullish, while a second rejection would be considered bearish and likely lead to price falling back down to test the 50% level again.
Price has created a rising wedge pattern which is a bearish type of price pattern. Rising wedges are a price pattern that have a wide base(A-B) and as price moves higher the distance between the highs and lows decreases creating a more narrow range. Once price reaches the apex of the wedge and falls below the lower support line of the wedge a measured move can be calculated in order to determine a potential lower level that price can be expected to reach. The measured move is calculated by taking the distance between the high and low of the base(points A and B) and subtracting that difference from the opening price of the first candle to open below the lower line of the wedge(C). Candle A had a low of $2,191.86 and Candle B had a high of $2,637.01 for a difference of $445.15.
(A $2,191.86 – B $2,637.01 = $445.15)
This value is then subtracted from the opening price of candle C which is $2,869.09 and gives us a lower price target of $2,423.94.
($2,869.09 - $445.15 = $2,423.94)
While a lower target can be calculated, it doesn’t indicate that price will definitively reach the target as rising wedge patterns only have a 60% probability of success, but it remains a pattern to keep an eye on regardless.
The Relative Strength Index(RSI) shows the green RSI line trending above the 50 level which indicates a bullish short-term momentum bias behind price. An RSI reading above 50 is considered bullish while an RSI reading below 50 is considered bearish, with the 50 level being the midpoint of the total RSI range(0-100). The purple RSI signal line is rising which indicates bullish momentum in the intermediate-term and is now crossing above the 50 level as well.
The Price Percent Oscillator(PPO) shows the green PPO line and purple signal line both trending above the 0 level which indicate bullish momentum behind price. A PPO reading above 0 indicates bullish price momentum while a reading below 0 indicates bearish momentum. The green line trending above the purple line indicates a bullish momentum trend which is what we are seeing now, but both lines have leveled off indicating a loss of upward momentum in the short-term. In general during an uptrend in price, you want to see the green line trending above the purple line, and for both lines to be rising above the 0 level.
The Average Directional Movement Indicator(ADX) shows the green directional line above the purple directional line which indicates a positive trend behind price. The histogram behind the directional lines has been on a steady decline ever since the green line crossed above the purple line which indicates weak, or declining, trend strength. In general during an uptrend in price, you want to see the green line rising above a declining purple line, with a rising histogram in the background which would indicate strength in the uptrend.
Volume during and after the selloff has been higher than that seen during the move to the all-time high made in February, but volume has been declining ever since the selloff low as price has moved higher. Declining volume as price moves higher is bearish and indicates that less traders are willing to buy which is needed in order to sustain the move higher in price.
Overall, the move higher in the S&P500 has been in contradiction to the underlying fundamentals in the economy which are overwhelmingly bearish with a record 33 million people having filed for unemployment benefits over the past 7 weeks and global trade essentially coming to a halt. 30% of companies in the S&P500 index have given up on providing forward guidance as the virus has led to a collapse in revenue and earnings as they were forced to shut down operations. Many companies have also suspended share buybacks and dividend payments which was a driving force in share prices over the past 10 years on the march to new all-time highs including the peak seen in February. Traders and investors appear to be betting on the Federal Reserve backstopping markets via unlimited money printing which for now is succeeding in propping up stock prices. We’ll need to see how consumers react to the re-opening of the economy and whether or not they will be as strong as they were leading up to the pandemic as consumerism makes up 70% of GDP. With 33 million people out of work the obvious trend would be a decline in spending, but the obvious hasn’t been too relevant with central bank intervention in markets as true price discovery has been destroyed.
Going forward, if price were to make a new high above the 61.8% Fibonacci level and take out the high made on April 29th(red arrow) it would negate the current rising wedge pattern and likely lead to a continuation in price to the upside. It would also lead to a redrawing of the lower wedge line to just below candle C and the 50% Fibonacci level where the last low was made prior to the potential move higher, and then we would watch for a possible rejection at the upper wedge line again. Should price reject at the 61.8% Fib level again and move below the 50% Fib level it would put the lower target of $2,423.94 in play which is roughly -17% lower than where price closed on Friday.
Current view on the SP500 is neutral. A push above the 61.8% Fib level would be bullish, while a cross below the 50% Fib level would be bearish.
