Sven Henrich via Northman Trader

2020 is off to the same start as 2019 ended: Trade optimism, liquidity injections and rising markets. I’ll offer a more in depth analysis in the days to come, but wanted to highlight corrective risk (what’s that?) in some charts, specifically in the yearly charts. Now that a new year has begun we can see the latest data points and they highlight the size of corrective risk in markets.

None of these corrective risks preclude the possibility of still positive markets this year, but frankly that’s a separate discussion to be had as markets and data unfolds in the months to come. Rather I want to highlight the technical implications of some these charts.

For now markets are entering 2020 in max greed mode:

And it’s notable that these readings are coming on vast extensions of charts above the historic norm suggesting that corrective risk whether from here or higher up is substantial.

And before the log chart Nazis are all over me: I’m using linear charts here on purpose for clarity purposes. The points I’m highlighting make zero difference whether they are on a linear or log basis, so calm yourselves.

All of these charts will focus on the yearly 5 EMAs (exponential moving averages) and the upper Bollinger bands. Note all these levels will change over 2020, but they all have relevance and they spread across wide ranges.

Let’s start with $SPX:

The upper Bollinger band is currently at 3143. There is no year where $SPX does not at least touch that upper Bollinger band. $SPX is currently entirely above it.

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The yearly 5 EMA is currently at 2817. There are years where the 5 EMA does not get touched. In most years the 5 EMA gets tagged. In most years with markets above the upper yearly Bollinger band there is a move that will at least pierce the area between the upper Bollinger band and the yearly 5 EMA.

Hence in principle $SPX has a corrective risk between 2816 – 3143 or up to 15%.

$NDX:

The upper Bollinger band is currently at 8206. There is no year where $NDX does not at least touch that upper Bollinger band. $NDX is currently entirely above it.

The yearly 5 EMA is currently at 7246. There are years where the 5 EMA does not get touched. In most years the 5 EMA gets tagged. In most years with markets above the upper yearly Bollinger band there is a move that will at least pierce the area between the upper Bollinger band and the yearly 5 EMA.

Hence in principle $NDX has a corrective risk between 7246 – 8206 or up to 18%.

$DJIA:

The upper Bollinger band is currently at 27991. There is no year where $DJIA does not at least touch that upper Bollinger band. $DJIA is currently entirely above it.

The yearly 5 EMA is currently at 25168. There are years where the 5 EMA does not get touched. In most years the 5 EMA gets tagged. In most years with markets above the upper yearly Bollinger band there is a move that will at least pierce the area between the upper Bollinger band and the yearly 5 EMA.

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Hence in principle $DJIA has a corrective risk between 25168 – 27991 or up to 13%.

Recently I spoke about $AAPL and $MSFT corrective risk. Here are the updated yearly charts for 2020.

$MSFT:

What’s the technical term here? Holy crap?

The upper Bollinger band is currently at $133. There is no year where $MSFT does not at least touch that upper Bollinger band. $MSFT is currently entirely above it.

The yearly 5 EMA is currently at $120. There are years where the 5 EMA does not get touched. In most years the 5 EMA gets tagged. In most years with markets above the upper yearly Bollinger band there is a move that will at least pierce the area between the upper Bollinger band and the yearly 5 EMA.

Hence in principle $MSFT has a corrective risk between $120 -$133 or up to 25%.

$AAPL:

The upper Bollinger band is currently at $252. There is no year where $MSFT does not at least touch that upper Bollinger band. $MSFT is currently entirely above it.

The yearly 5 EMA is currently at $221. There are years where the 5 EMA does not get touched. In most years the 5 EMA gets tagged. In most years with markets above the upper yearly Bollinger band there is a move that will at least pierce the area between the upper Bollinger band and the yearly 5 EMA.

Hence in principle $MSFT has a corrective risk between $221-$252 or up to 25%.

None of this is to say markets can’t close higher on the year, but these charts suggestive sizable corrective risk some time during 2020 which may well prove to be buying opportunities, but the chart damage and context will have to be assessed then. Some of these corrective risk may turn out to be minor, in the 5%-10% range, but some of it suggests potential larger and most severe corrections which, in context of the larger structural backdrop may result in a bear market were they to result in larger technical damage (TBD then).

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As it stands to be buying these indices or stocks here is to ignore all technical history and count on these charts not connecting with at least their upper Bollinger bands or worse: In the direction of their yearly 5 EMAs. If one is looking to buy the charts suggest better entry opportunities to come. For those interested in shorting these charts offer a rough roadmap as to potential corrective target ranges.


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