Behold, The Dawning

Authored by Sven Henrich via,

The dawning may have begun, the realization that growth again has been overstated.

Be it a China deal that’s dragging on with no clear path to resolution, and/or economic data that keeps disappointing. With index charts showing signs of potential topping patterns, yet support holding at the moment, I wanted to briefly follow up on some technical observations I made on CNBC this morning:

While I referenced the equal weight issue, I honed in on current price action being a battle for control, bears need to break 2800, bulls need to get back above 2900, in the meantime we’re stuck in a chop range with buyers and sellers fighting it out.

Let’s look at some specific technical levels and how they may go a long way in helping identify when and where we have a clearer sense about who’s winning the battle for control.

In the interview I mentioned 2640 as potential target should we break 2800 AND 2776.

Why these numbers?

For one $ES is engaged in a potential head and shoulders pattern that targets 2640 precisely:

That level would also coincide with the .5 fib offering confluence support.

Note $ES is not the only index chart with a potential H&S pattern, here’s the $DJIA:

$DJIA, like many other indices, never sustained a move back above the January 2018 highs. Holding the May lows then is critical to avoid a technical trigger break.

And let’s be clear, without a break of 2800 bears have nothing, but a nice May pullback.

As I also indicated in the interview we’re currently seeing some oversold conditions emerging, example the stochastic on the $NYSI is max oversold at the moment:

That does not preclude new lows, but it also puts bears on notice: A rally is coming, question is from where.

I mentioned seasonality in the interview as well, but pointed out that turning markets in May can also bring sizable further downside risk for June.

As we’re approaching the end of May this week and are heading into June next week here’s a historic look $SPX performance between the end of May and the end of June since 2000:

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What’s that tell us? In 5 years markets were basically flat between the end of May and the end of June. 5 years were up between 2%-4%. 8 years were down between 2%-8%.

Hate to call this a coin toss, but fact is sizable downside can emerge in a June month and the 2640 target zone then wouldn’t be such a crazy target. That’s nearly 11% off the highs and most likely to produce a major rally from there into end of June/early July. So theoretically one could see that drop and then a bounce from there into month end making the overall decline from end of May to end of June much more muted, ie 3%-6% for example.

However, and this is why also I mentioned 2776 as a key level, the 200MA, should markets drop below 2800, the 200MA zone and quarterly 5 EMA zone would also offer intermittent support:

As long as bulls can defend this area, should we get there, bulls may be fine.

But let’s be clear: There’s been no break of 2800 yet, and for now all this remains theoretical, but keep these levels in mind in case we do get a break.

In the meantime, how do we know when bulls are regaining control? Simply put, they need to close a week above the weekly 5 EMA:

This weekly chart, simple as it is, is actually quite interesting.

Firstly note how the May highs stopped at the 2016 trend line resistance dating back to the US election low, hence this minor correction here actually reacted technically quite cleanly.

Also note the weekly 50MA is also coinciding with the daily 200MA I outlined earlier offering further confluence support on a break below 2800. So for all the ethnical pattern targets I would expect a further price battle in the 2750-2780 zone on a break below 2800.

Finally note how the weekly 5 EMA has been resistance and a point of rejection in the past 2 weeks. In Q1 it was support, now it’s resistance. To get to 2900 again, bulls need to close a week above the weekly 5 EMA. It’s currently sitting at 2856. And also note $SPX also need to regain its 50MA which is currently at 2874, bulls also need to recapture that price one to regain control.

So there you go: The battle for control is cleary defined. Bulls must get above 2856 at least and stay above and bears need a break below 2800 and stay below. In the meantime: Chop.

But as I said this morning in the interview: The longer this trade war drags on the more the pressure on economic indicators that are already at risk of signaling a cycle turn. It is entirely possible to trade war oneself into a recession.

Hence my original assertion:

The premise: The pressure to make a trade deal would come from lower, not from 5% below all time highs. And that realization may be dawning on  market participants as well.

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