The theme of last week analyses was Do we have technical reasons for a correction, and can the coronavirus be the missing ingredient to push the markets?
That theme continues now, with the next question - If we have a correction, how far can it go? I will go now trough some large time frame charts, but before that, lets just see what are the scheduled data releases and earnings for the next week, in the table below.
Chinese PMI, Google earnings, NFP report - those are the most important events.
US indices are out of sync for a long time, as we can observe on Chart #1 of the "Holy Trinity" - of SPX, NDX and RUT. Just check that monthly candle on SPX. A rare sight.
On Chart #2 we can observe price breaking the trend channel that was holding the price from October lows. We had two trend down days last week. First one came on Monday, with the gap down - and that was easier to predict than the next one, since it came on Friday, after the hard push up on Thursday. Gap was filled on SPX, and trend down day on Friday ended right at DMA50 - old school stuff. Markets / PA are NOT random.
This is a change in tone, since Buy-The-Dip strategy was a good one for months. As written here, and in Morning notes on numerous occasions, very similar PA like in Jan 2018. The thing with this slow grinding higher markets, that don't make proper pullbacks, is the following - the longer the time market is doing that, the greater the pullback is going to be. Going to Chart #3 - and there was 17 unfilled cash gaps before, and now we have 12 below the price, and one above.
So, how far can it go?
SPX Support levels are ~3210 / 3155 / 3070 / 3028.
Even getting to the ~3030 would not harm the overall bullish structure, but holding below it would.
The weak cousin RUT, the small cap index doesn't follow SPX / NDX for a long period of time. It made a lower high and a hard U-turn toward previous resistance. What we can observe on Chart #4 is - good odds of revisiting 1600 level for start, and then 1580-1600, where we had that 3 weeks long bull flag.
Since market spend there plenty of TIME -> this is an area where we SHOULD get a bounce. Again - When market doesn't do what it SHOULD do, opposite CAN happen. In that case, HOLDING below 1580 opens door for more donside.
Important - POKING below or above levels is NOT the same as HOLDING above/below them.
Let's observe German DAX for a moment.
Chart #5 is a monthly chart. Situation is FALSE break above the prev. ATH, and on a zoomed part we can see the importance of 12,885 level (hey that was a low of the day on Friday - that would be your reaction right now).
Also observe that level as a border line of a 3 month trading range.
Going to Chart #6, which is the usual Daily Cash Index chart. Now we have two unfilled gaps above the current price, and the first one to the downside is at 12,867.
So, how far DAX can go?
IF it does not hold above 12,800 -> next levels are 12,650 and 12,500. Bounce toward the 13,100 area would be nice to have first, and then we can go day-by-day. Going to 12,500 would not be nothing out of the ordinary, when we observe size of prior down moves.
Check this FDAX chart by clicking here. So, dip on ~12,500 is a buying opportunity, on the first test. Red arrow on that chart pointing to the trendline, that was lost on Friday.
DAX patterns have great similarities with the previous period, from Jan 2018 - check the chart from week ago by clicking here. Megaphone patterns.
Corrections are a GOOD THING, believe it or not. It doesn't seem like that to the late buyers, and I know that, BUT - "In order to rally, market need to crash first". It doesn't require a crash, a good 10% correction can also do the trick. SPX made almost 500 points from the October lows, so to go down toward ~3030 would not be all that bad. In the same time, it opens a WORLD OF OPPORTUNITIES for us. Opportunities that does not exist in slow grinding markets. Rise in volatility and bigger daily ranges.
The thing to look would also be Nasdaq 100, since NDX made the biggest push, it is ABOVE the DMA50. In the same time, it sold off hard on Friday, even though Amazon moved 10% higher on earnings. Take a look on daily charts of Facebook, Apple, Microsoft and Google. Take a look at daily chart of VIX. I would raise my eyebrow on that.
What can be the unexpected news that can turn this downside potential?
Making an effective coronavirus vaccine would likely be a case for a relief rally. What are the odds for that? Likely very low odds for this to happen next week.
Higher odd scenario is - more downside to come, IF markets can't hold current support levels, and that is DMA50 area on SPX, and current lows on DAX.
At the end - do you like this kind of Analyses? If you do, share this post, retweet the announcement tweet - you know... "share the love".
In short term trading it is very important to properly understand context heading into every day, to know from which side wind is blowing - who has the short term control, and which side will be forced to liquidate IF and WHEN market hold above or below a certain level. What is the level of volatility, what can we expect from any particular day, what market already done in premarket session, what possible setups can be available, and so on... the things that we constantly learn in the DAILY DOSE OF DAX.