Technical Analysis Update: The Lines That Matter for Stocks Today
The markets are down hard this morning.
There are a myriad of reasons. The most important one concerns price: stocks were extremely overbought and overextended. It was time for a correction.
The S&P 500 had just made an explosive move higher out of a rising wedge formation (blue lines in the chart below). This move had brought stocks to a line of major overhead resistance (red line in the chart below).
As I wrote earlier this week, it is highly unlikely stocks would break that red line on the first try. So a correction is expected here.
The question is where it stops.
“Risk Off” Mode in the Markets
I’ve drawn the support lines to watch (green lines in the chart below). As I write this, stocks have already sliced through the first and are testing the second.
In the big picture, the fact is that the economic shutdown triggered by the COVID-19 panic has done PROFOUND structural damage to the US economy. Stocks have largely ignored this, experiencing a kind of “sugar high” by focusing on the record amounts of liquidity the Fed is providing.
However, stocks now appear to be waking up to the damage. We are entering a “risk off” mode in the markets. The bull market case remains intact – provided we remain above the 50-week moving average shown below.
That is THE line in the sand for a real meltdown. Provided stocks can remain above this level, the bull market remains intact.
Be safe out here!
Editor, Money & Crisis