The Stock Market Action Makes Sense If You Look At The Big Technical Picture – Mike Swanson (10/27/2020)

Yesterday the DOW fell over 600 points and almost everything was down one way or another. There is once again bad news of virus cases starting to grow again like they did in early June, but that didn’t matter for the stock market then so does it now? Many are calling for a big stock market crash after the election, but markets tend to price in bad news before it happens and then rally once the bad news is all played out in a reverse buy the rumor sell the news trade. We did see the market bounce this month into earnings after the S&P 500 fell 10% from a peak made around Labor Day so is this just momentum running out again?

There are lots of questions and worries and really no real way to predict exactly what will happen on election day or how long it will take to count all of the votes up.

But what is happening with the US stock market is pretty clear if you push all the news out of your mind and just look at the simple price chart of the S&P 500, because it is doing what I talked about a few weeks ago – and that is starting to establish a range bound market trend.

Remember the stock market crashed in March! At one point it was the quickest and steepest drop from a high the S&P 500 had ever seen before. And then when the market made a bottom it had one of its biggest rallies ever. Extreme swings eventually lead to a period in which volatility actually shrinks in the market and a trading range market becomes the new trend.

On Labor Day the RSI hit a nosebleed reading – which meant that the rally was unsustainable. If the market wasn’t going to keep going up like it did into Labor Day that meant it would pullback and likely enter a period of range bound sideways price action That appears to be what is starting now.

Let me explain these indicators.

1)The RSI on the top is an oversold/overbought indicator and it went to a rare extreme on Labor Day.

2)The indicator on the bottom is the 90-day rate of change indicator. Normally this indicator trades below 10 and above -10 for the S&P 500. As you can see when the market crashed it collapsed to -30 and then swung to +40 August for a 70 point move. These are wild price swings and now this indicator is slowly going back to a normal level. Expect this process to continue over the coming months even if there is volatility for a few days around the election.

3)The horizontal blue lines are the retracement levels for the S&P 500. The 1/3 retracement point is at 3054 and the 200-day moving average is now at 3125. If the market does pullback around the election look for these levels to act as big support.

One way or the other I think the odds are that we’ll see the S&P 500 hit its 200-day moving before the end of the year and then establish a trading range well into next year that will be defined with that area acting as major support and the highs around Labor Day as resistance.

Note that the 200-day moving average is slowly going up and should be around 3200 by Thanksgiving.

No matter if the DOW goes up or down 700 or even 1000 points around the election I think once that news is done this sort of trading range will become established for the US stock market. I’m looking for the market to trade in the blue circle I drew on the chart – that’s my forecast. That’s a forecast for the market not to crash after the election, but to enter an overall sideways trend for quite some time going forward.

The US stock market isn’t always going straight up or down. It can go sideways for months and even a year at a time. I have circled many such times in this long-term chart.

This means going forward that it’ll be easier to make money in the right sectors and stocks acting better than the market is than the S&P 500 itself. Notice gold barely fell at all yesterday.

-Mike



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