SP500 and Nasdaq Analysis
Market Analysis SP500 and Nasdaq (19.01.2020)
The past year saw a great market recovery and the confirmation that the bulls are still in control, most likely thanks for the FED intervention (three rate cuts and resumption of QE) and the hopes of a substantial trade deal with China.
SP500 (technical analysis)
The SP500 futures weekly chart (Figure 1) shows a market that is, at least in the short term entering over-bought territory with a RSI that just reached 80. The highest RSI reading of the last two years. |
| Figure 1: weekly chart of the SPX500 |
This pattern is not so different from what happened in the beginning of 2018 when the SPX500 kept climbing until it reached a record value of the RSI, 90, after which it entered into a one year long correction that took the whole 2018 to be resolved.
If the pattern repeats itself the over-bought conditions might persist for a bit longer and the value might climb closer to 90 before some sort of correction is due to happen.
The highest target that experts set for the year is 3500 which would be more or less a symmetric gain from the last correction initiated from the level of 2800.
The first reasonable support for a correction could be around 3100, then bounce off the lower channel trend line and resume the upward momentum. If the support at 3100 seems to hold I would consider this the last short term good buying opportunity.
If the market breaks below 3100 for a test of 2940 level, I would suggest becoming very cautious.
If 2940 support breaks, the SP500 could fall all the way to a stronger support around 2800 and from there the situation would become very uncertain and panic for a recession would begin to spread.
So far the growth of the market coincided with a VIX decline which could legitimize the move, at least in the short term, as soon as the VIX becomes to trend higher, I would prepare for the correction coming shortly afterwards.
NSDQ100 (technical Analysis)
Figure 2, illustrates the weekly chart of the Nasdaq futures.
It follows more or less the same pattern as the SPX500, but it looks more overbought compared to historical records.
The RSI value of 82, is just one unit from the record 83 value, the highest value reached in the last decade which indicates that the continuation of this move without a correction coming shortly or a consolidation period would be unsustainable for the short period of time.
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| Figure 2: NSQ100 |
If a correction is initiated the first significant support would be around 8450. If that breaks we could see a fall to the first strong support which would be placed just above 8000.
If that were to break I would become very cautious with the trading activity and panic would begin to spread through the markets so sustained selling especially of ciclicals.
The next support would be around 7600, then just above 7000 (around 7060) and if a much deeper correction were to happen the 2018 low would be the next strong support at 6000.
Conclusions
In the short term the market appears a bit over-extended, especially the NSDQ100.The question is not much about "what can disrupt the market" but "how much of the good news have been already priced in" ?
And, what will be the next good news that will push the market even higher?
It appears to me that the downside risks are increasing day by day while the upside is already mostly priced in.
The earning season that started in a good way with the bank will continue during the next weeks, so they might provide the market with new reasons to move even higher but a healthy correction after the end of January is something that should be expected and be prepared for.
I will personally increase exposure to TLT and GDXJ while gradually reducing my stocks holding, waiting for a good opportunity to buy again later on if a correction were to occur.
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