Sven Henrich via Northman Trader

No market video this weekend as my wife has threatened to quarantine me to the woodshed if I put the time into a producing a video. No, she’s right, time to decompress. It’s been a very intense few weeks and the weeks will continue to be intense going forward.

But in lieu of the video this weekend I wanted to offer some quick thoughts and a few charts. Some risk considerations, but also some potential positives.

This is no longer about bulls and bears, this is now about our way of life. I don’t want to sound hyperbole here, but we still don’t know how any of this will unfold. We can all rightfully hope that all the drastic measures we now seen undertaken will get this virus under control and hopefully in a few weeks things can return to normal. It’s an absolute human tragedy that is unfolding in places such as Italy and each death is a travesty. And we don’t know how long or deep this will go. Nobody does.

This new virus has caught the world by surprise. Is it a one off that science will manage to control, or are we looking at a paradigm shift here? A virus that, like the flu, will now be around and mutating each year, but unlike the flu is much more aggressive, deadly and more difficult to combat? We can’t know yet, the prospects are daunting and humanity will have to adjust big time if this is the case.

While we all may live in our own insulated bubbles of perception, things certainly hit home for me when I drove through the small town we live nearby last night and found it shut down and deserted. No humans, no cars. Ghost town. UK schools are looking to shut down until September at least. For many families this already is a paradigm shift.

And the fear is suddenly palpable. Stores that were still fully stocked last week were suddenly void of any supplies.

My experience in the UK in past 24 hours:

No, things are real and people are hurting big time. Just in our local circle of friends here one person has already lost their business, another one is about to, others are feeling the pressure big time. We live in the country side and so we are very insulated from it all, but nobody can escape this. We have one neighbor only, a real estate developer with a multitude of projects in the pipeline, and he suddenly came by asking me to buy some land off of him including part of a forest he owns and I was glad to be in a position to help him out. Like many he sees all his projects freezing up with no visibility going forward.

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So things are real, they are immediate and very urgent. Governments have no choice but to launch the greatest bailouts and stimulus packages of our lifetimes. Again. The ultimate consequences are neither here nor there for the moment and I highlighted some of them in the Big Picture.

We’ll get through this ultimately, but it won’t be easy and the immediate concern is a complete collapse of the economic and financial backbone of our way of life.

This week the Fed introduced new panic measures every single day. From rate cuts to zero, to daily trillion dollar repos, to a whole heap of measures none of which arrested the selling as markets closed at the low of the week. Liquidations, funds blowing up, enormous damage done to portfolios around the world with far reaching consequences.

While I personally don’t mind arrogant and complacent bulls to get a bit of a spanking after years of excess I also don’t want to see millions get absolutely wiped out and devastated by all this. We’ve already had this in 2008. My worry is simply that the excess of the past 10 years has left us all vulnerable. Central banks too scared to normalize are impotent now, and the ill conceived tax cut of 2017 has not only resulted in exacerbated valuations, but has also robbed us of a potential big stimulus weapon for a rebound.

The US will introduce a massive stimulus program in short order. I don’t know what they are still waiting for, but it seems to me they have perhaps only hours or days left before things get really gnarly.

Indeed, looking at charts we have arrived at a key pivot point. Instead of overwhelming you with a bunch of charts I just want to focus on a few key ones.

The broader $NYSE index is a fascinating one to look at. Why? Because it contains over 2,000 stocks and gives you a better sense what’s going on in the overall economy.

And the message is one of an utter and complete collapse:

Four years of buying wiped out, dropping even far below the US election of 2016 and now sitting at the 2016 lows.

The MACD showing how absolutely vertical the collapse has been.

Here’s the larger time frame to gain an appreciation of what an utter shock to the system this is:


Now let’s put this all in a historic context.

On twitter this week I highlighted that $NYSE has reached a key support zone:

And indeed we got a big rally off of this support zone during the week. Even on Friday morning before market open $ES rallied all the way above 2,500 before collapsing again:

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So yes, incredible chop in this market, but big tradable moves off of technical support and into resistance offering something for both active bulls and bears.

Now look where we closed on Friday:

Right above this support zone and the support zone being defined by the previous pivot lows going back years as well as the descending trend line of the larger infamous megaphone (I’ll get to that further below).

But it’s not only these two areas of support that define this price level on $NYSE. No, there are two additional key technical reasons why this zone is critical, this one term monthly chart highlights them:

The support trend line dating all the way to 1974 as well as the .382 fib dating from that time.

The combination of these 4 factors offer amazing technical confluence. Knowing this market is massively oversold it lends credence to the historical & technical arguments I made this week for a month end rally still to emerge. After all the financial system has a lot at stake to try to minimize the damage of an absolutely disastrous quarter.

But that only works if the liquidations can be brought under control and that the measures introduced show effect. Much is riding on the stimulus package the US aims to introduce by Monday. The combination of all these efforts and historic oversold readings have the potential to create a vacuum sucking rally of epic proportions once the supply of liquidations runs its course and now under invested asset managers seek to re-enter this market.

But besides support having held on $NYSE on Friday there’s also technical trouble brewing.

For while $NYSE has held onto support $SPX lost its .382 fib support on Friday at the close as it dropped below the December 2018 lows:

It is a monthly chart and breaks such as this can be repaired by month end. But the break does imply further downside risk first and here the megaphone chart can help address some immediate downside risk areas:

Yup, ugly. Should the wheels come off Sunday night into Monday the next immediate large support zones are the 2016 summers highs and the 2015 highs around 2,200 and 2,130 which implies another 3%-7% immediate risk lower with the megaphone trend line currently sitting at 2100. While principally a 3%-7% drop may not be that dramatic it sure would feel terrible for long holders of stocks that have just seen $SPX drop 32% in 5 weeks.

Whether we get these lower risk zones I can’t say but they are clearly possible in this environment as prices move incredible fast and liquidations are still present. Such a move would also imply $NYSE breaking its confluence support zone so nothing pretty about such a move should it occur.

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A broader linear chart also offers perspective about the the historic nature of these market movements over the past few months.

From bear hell to bull hell:

What were stable trends over the past 12 years were just busted in both directions.. First the Fed liquidity rally to new highs appearing to break above the long standing uptrend. Bears were besides themselves while bulls got set up for the biggest bull trap in history.

And now the historic collapse not only invalidating the break out as false but also busting the long standing support. Bulls will want to hope that this breakdown is just as fake as the break to the upside. But now they are faced with immense resistance to the upside on a future rally.

Let’s be clear here: Without a very quick and complete resolution to this virus crisis the world is in major trouble and the damage inflicted is historic.

And the fear is real. It does not help to panic but one must be cognizant of the fear. As I walked into the store today and found shelves empty I was reminded of an old joke: Two guys hike in the woods when they come across a giant grizzly bear. One of the guys suddenly sits down and takes off his hiking boots and puts on his running shoes. His friend says to him:”What are you doing? You can’t outrun a bear”. The guy putting on his running shoes replies: “I don’t need to outrun the bear, I just need to be able to outrun you”.

Looks like I was too late putting on my running shoes going to the store today.

Look. I personally don’t prescribe to fear or panic. All we can do is navigate markets by identifying key technical pivot levels, react to them and then take advantage of the incredible volatility currently running through markets. Moves that used to take weeks and months now happen in days and hours. It’s incredible. Markets will calm down again at some point, but don’t expect $VIX 11 again anytime soon. That ship has sailed. Markets will remain subject to elevated to heightened price volatility in both directions for months to come. Best get used to it and take advantage of it. Since we can’t leave our homes right now may as well.

See, there’s always a silver lining ;-).

Anyways we’ll get through this. It won’t be easy, but humanity has had to deal with far worse situations.

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