The Covid-19 Bear Market Moves Into A Consolidation Trading Range

All five major U.S. equity averages set bear market lows last Thursday or Friday. The S&P 500 and Nasdaq Composite fell from all-time intraday highs on February 19 to bear market territory in just 16 trading days.

Friday’s rebound was the biggest one-day gain in history, but weekly charts ended the volatile week negative.

Last week I indicated that most analysts on Wall Street expected the February 28 lows to hold. I disagreed but now I feel that the March 12 lows establishes the low end of a trading range that will hold until the second leg of a bear market occurs.

Let’s Review My Factors Of Concern And Add To The List:

1. The global spreading of the coronavirus is slowing the global economy and will put pressure on the U.S. economy.
2. The big banks including Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC) are in bear market territory. You cannot have a bull market for stocks with banks in a bear market.
3. Junk bonds are getting crushed. Spreads versus U.S. Treasurys are widening significantly. This will make it difficult for corporations to refinance their corporate debt.
4. Federal Reserve policy is wrong and will hurt Main Street USA and the banking system. Lowering the Federal Funds rate with record low Treasurys accomplishes nothing. Zero and negative rates that have been the global policy since 2008 is a failed policy resulting in a global debt bubble of $250 trillion.
5. Household debt is above $14 trillion for the first time ever.
6. Russia and Saudi Arabia began a crude oil price war designed to hurt the U.S. dominance in the crude oil market.
7. Lower rates orchestrated by central banks around will put more pressure on the global debt bubble. You cannot add more debt on top of the debt bubble. This bubble will pop with defaults cascading around the world. At the center of this risk is the major U.S. banks.

Here’s Last Week’s Scorecard

The Dow traded as high as 29,568.57 on February 12 but stayed shy of its annual and semiannual risky levels at 29,964 and 30,361, respectively. It’s now in bear market territory, 21.6% below the high. From the high to the March 12 low of 21,154.46 the decline reached 28.5%.

The S&P traded as high as 3,393.52 on February 19, which was between its semiannual and annual risky levels at 3,302.4 and 3,466.5, respectively. It’s now below these levels and in bear market territory, 20.1% below the high. From the high to the March 12 low of 2,478.86, the decline reached 27%.

The Nasdaq traded as high as 9,838.37 on February 19, which was above its semiannual and annual risky levels at 9,074 and 9.352, respectively. It’s now below these levels in bear market territory, 20% below the high. From the high to the March 12 low of 7,194.67 the decline reached 26.9%

Dow transports are in bear market territory, 31.7% below its all-time intraday high of 11,623.58 set back on September 14, 2018. It set a new 2020 low of 7,253.10 on Thursday, March 12. At this low, transports were 37.6% below the all-time high.

The Russell 2000 is deep into bear market 30.6% below its all-time intraday high of 1,742.09 set back on August 31, 2018. It set a new 2020 low of 1,109.39 on Friday, March 13. At these low, small-caps were 36.3% below the all-time high.

Describing the Weekly Charts

The weekly chart for the Dow Jones Industrial Average remains negative with the average below its five-week modified moving average at 26,789. Its 12x3x3 weekly slow stochastic reading declined to 48.32 last week, down from 61.93 on March 6. The Dow is below its 200-week simple moving average or “reversion to the mean” is 23,58723,616. The Dow is below weekly, monthly, quarterly, annual and semiannual risky levels at 24,515, 27,337, 27.432, 29,964 and 30,361, respectively.

The weekly chart for the S&P 500 remains negative with the index below its five-week modified moving average at 3,079.2. Its 12x3x3 weekly slow stochastic reading declined to 52.03 last week, down from 67.16 on March 6. This index traded below it 200-week simple moving average or reversion to the mean at 2,640.0 but ended the week above. Its weekly, quarterly, monthly, semiannual and annual risky levels at 2,873.8, 3,103.0, 3,153.1, 3.303.4 and 3,466.5, respectively.  

The weekly chart for the Nasdaq remains negative with the index below its five-week modified moving average at 8,815.9. Its 12x3x3 weekly slow stochastic reading declined to 52.61 last week, down from 68.12 on March 6. As a positive, the Nasdaq is above its 200-week simple moving average or reversion to the mean is 6,969 with its weekly, quarterly, monthly, semiannual and annual risky levels at 8,430, 8,860, 8,961, 9,074 and 9,352, respectively.  

The weekly chart for the Dow Jones Transportation Average remains negative with the average below its five-week modified moving average at 9.794. Its 12x3x3 weekly slow stochastic reading declined to 29.77 last week, down from 38.10 on March 6. The average is way below its 200-week simple moving average or reversion to the mean at 9,858. The March 12 low is 7,253.10 with its weekly, monthly, quarterly, semiannual and annual risky levels at 8,399, 10,159, 10,349, 12,155 and 12,755, respectively.

The weekly chart for the Russell 2000 remains negative with this average below its five-week modified moving average at 1,512.73. It’s 12x3x3 weekly slow stochastic reading declined to 38.01 last week, down from 50.69 on March 6. Its below its 200-week simple moving average or reversion to the mean rose to 1,477.0. This index is below its weekly, monthly, quarterly, semiannual and annual risky levels at 1,332.65, 1,547.91, 1,616.55. 1,699,61 and 1,910.58, respectively.

How to use my value levels and risky levels:

The closes on December 31, 2019 were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Monthly levels for March were established based upon the February 28 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

——

Want to learn how to integrate trading levels into your everyday trading strategy? Check out my new publication, 2-Second Trader.