SPX - Update - 61.8% Fib in Sight - Bull or Bear?
The SPX has broken above the 50% fib level and looks set to visit the 61.8% retracement.
Prior Analysis
We have already moved beyond my prior analysis targeting the typical 50% retracement, whilst this is not uncommon it is certainly a testament to the power of stimulus and a positive narrative, or perhaps naivety, as the Federal Reserve has stepped up their "stimulus" to unprecedented levels, north of 1.5 trillion within the past 4 weeks.
With Lorrie Logan, head of the federal reserve's open markets, signaling that further irreversible intervention is inevitable:
"supporting smooth market functioning does not mean restoring every aspect of market functioning to its level before the coronavirus crisis. Some aspects of liquidity—especially aspects related to transactions costs and market depth—are importantly affected by fundamental factors such as how the current extraordinary uncertainty about the economic outlook influences trading behavior. These aspects of market functioning may not return all the way to pre-crisis levels for some time, even as our purchases slow."
With the knowledge that the Federal Reserve is and will continue to be the buyer of last resort, barring direct stock purchases (for now, but that will change shortly).
How do we play these markets?
The US economy is not going to open until May 1st, at the absolute earliest, according to "leaked" white house documents:
"The plan lays out three-phases: Preparing the nation to reopen with a national communication campaign and community readiness assessment until May 1. Then, the effort, through May 15, would involve ramping up manufacturing of testing kits and personal protective equipment and increasing emergency funding. Then staged reopenings would begin, depending on local conditions. The plan does not give specific dates for reopenings but specified "not before May 1."
Furthermore the same document states that government intervention is likely to continue until a vaccine is available:
"The plan also carries this warning: “Models indicate 30-day shelter in place followed by 180 day lifting of all mitigation results in large rebound curve - some level of mitigation will be needed until vaccines or broad community immunity is achieved for recovering communities.”
This fact alone, would suggest that the downside is not over just yet as the longer the lock-down measures remain in place the more the US economy will continue to bleed.
But we must not get too bearish too soon.
Gap Fills?
The correct play at the moment, in my opinion, is to expect more upside albeit only for the short-term, as the rush of stimulus and the apparent slowing of global infections continues to placate markets and with the breadth of CB purchases, the path of least resistance is up.
That being said.
I will be looking to go short, should the market fail at the 200 ma or at the 61.8% fib level.
I will be open to long positions, similar to my WES trade, which produced gains of over 170% in little over a few days, but i am more comfortable, waiting in cash for the time being, as even the slightest bit of bad news can send the markets tumbling lower.
-TradingEdge
Sources:
Federal Reserve Operations:
https://www.zerohedge.com/markets/ny-fed-head-trader-scale-our-asset-purchases-has-been-unparalleled
White House Document:
https://www.zerohedge.com/geopolitical/white-house-leaks-draft-plan-reopen-american-economy
BlackRock Following Fed Purchases:
https://www.zerohedge.com/markets/investing-now-dead-worlds-largest-asset-manager-says-well-just-buy-whatever-central-banks
Prior Analysis
We have already moved beyond my prior analysis targeting the typical 50% retracement, whilst this is not uncommon it is certainly a testament to the power of stimulus and a positive narrative, or perhaps naivety, as the Federal Reserve has stepped up their "stimulus" to unprecedented levels, north of 1.5 trillion within the past 4 weeks.
With Lorrie Logan, head of the federal reserve's open markets, signaling that further irreversible intervention is inevitable:
"supporting smooth market functioning does not mean restoring every aspect of market functioning to its level before the coronavirus crisis. Some aspects of liquidity—especially aspects related to transactions costs and market depth—are importantly affected by fundamental factors such as how the current extraordinary uncertainty about the economic outlook influences trading behavior. These aspects of market functioning may not return all the way to pre-crisis levels for some time, even as our purchases slow."
With the knowledge that the Federal Reserve is and will continue to be the buyer of last resort, barring direct stock purchases (for now, but that will change shortly).
How do we play these markets?
The US economy is not going to open until May 1st, at the absolute earliest, according to "leaked" white house documents:
"The plan lays out three-phases: Preparing the nation to reopen with a national communication campaign and community readiness assessment until May 1. Then, the effort, through May 15, would involve ramping up manufacturing of testing kits and personal protective equipment and increasing emergency funding. Then staged reopenings would begin, depending on local conditions. The plan does not give specific dates for reopenings but specified "not before May 1."
Furthermore the same document states that government intervention is likely to continue until a vaccine is available:
"The plan also carries this warning: “Models indicate 30-day shelter in place followed by 180 day lifting of all mitigation results in large rebound curve - some level of mitigation will be needed until vaccines or broad community immunity is achieved for recovering communities.”
This fact alone, would suggest that the downside is not over just yet as the longer the lock-down measures remain in place the more the US economy will continue to bleed.
But we must not get too bearish too soon.
Gap Fills?
The correct play at the moment, in my opinion, is to expect more upside albeit only for the short-term, as the rush of stimulus and the apparent slowing of global infections continues to placate markets and with the breadth of CB purchases, the path of least resistance is up.
That being said.
I will be looking to go short, should the market fail at the 200 ma or at the 61.8% fib level.
I will be open to long positions, similar to my WES trade, which produced gains of over 170% in little over a few days, but i am more comfortable, waiting in cash for the time being, as even the slightest bit of bad news can send the markets tumbling lower.
-TradingEdge
Sources:
Federal Reserve Operations:
https://www.zerohedge.com/markets/ny-fed-head-trader-scale-our-asset-purchases-has-been-unparalleled
White House Document:
https://www.zerohedge.com/geopolitical/white-house-leaks-draft-plan-reopen-american-economy
BlackRock Following Fed Purchases:
https://www.zerohedge.com/markets/investing-now-dead-worlds-largest-asset-manager-says-well-just-buy-whatever-central-banks
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