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Another Consolidation or Something More?

What happened on Monday (4/20/20) was another unprecedented day for financial markets. For the first time in trading history the May WTI Crude Oil contract fell into negative territories (-$37.63 a barrel). This crash resulted in an astonishing 1-day decline of $55.90 or over 300%.


This is a rare trading phenomenon as negative Oil prices imply extreme fear as someone who has a long position in Crude oil is willing to pay someone to take over ownership of the commodity position. Oil’s incredible plunge leaves many on Wall Street and Main Street shocked and confused. The COVID-19 pandemic and the global lock-down have led to the global glut of Crude Oil as there is simply not enough storage capacity to fill up the excesses of Crude Oil and hence the collapse in this commodity.


Historically, Crude Oil tends to be a proxy for global economic conditions. Many believe the recent collapse in this important commodity is a major warning sign of an impending global recession that may be much deeper and more extensive than expected.


It is interesting when WTI Crude first fell from 53.66 (2/20/20) to 19.20 (4/15/20) or -64.87% this led to a sharp and broad equity market sell-off (-32.5% to 35.5%). So, the pertinent question now becomes, is the recent -75.93% decline from 4/16/20-4/21/20 forewarning the start of another major sell-off in global equities.


Enclosed below are the updated technical conditions of three key US stock market indexes. Pay close attention to these key technical levels as the ability to find support along these key support zones may lead to the resumption of the equity recovery. However, convincing violations of these critical supports can also lead to the next major market downturn.


S&P 500 Index (SPX – 2,736.56)


The -35.41% Feb-Mar 2020 bear decline has led to the 3/23/20-4/17/20 SPX oversold rally (+31.36%). However, this rally stalled at 2,879.22 (4/17/20) as failure to breakout above its key intermediate-term resistance along 61.8% retracement (2,934.5) from Feb-Mar 2020 decline (2,934.5) and the 200-day ma (3,010.5) warns of a near-term consolidation to initial support at 2,617-2,641 (4/6/20 breakout and 38.2% retracement from Mar-Apr 2020 rally). Secondary support is 2,536-2,574.5 (4/6/20 gap up and 50% retracement), and below this to 2,447.5-2,455 (4/1/20 low and 61.8% retracement). Violation of 2,447.5 warns of a deeper correction toward 2,301-2,344 (3/24/20 gap up) and then 2,191.86 (3/23/20 low).


Dow Jones Industrial Average (INDU – 23,018.88)


INDU bear decline from Feb-Mar 2020 (-38.40%) has led to a strong oversold rally from 3/23/20-4/17/20 (+33.22%). However, INDU encountered key intermediate-term resistance at 24,264.21 (4/17/20) just below its 61.8% retracement (25,231) from the Feb-Mar 2020 decline and its 50-day ma (24,322). An oversold condition coupled with the recent failure to breakout as well as a bearish island reversal (4/21/20) warns of a near-term consolidation to initial support at 21,958-22,595 (4/6/20 breakout and 38.2% retracement from Mar-Apr 2020 rally). Secondary support is 21,243-21,694 (4/6/20 gap up and 50% retracement), and below this to 20,528-20,735 (4/2/20 low and 61.8% retracement). Violation of 2,0,528 warns of a deeper correction toward 19,121-19,649 (3/24/20 gap up) and then 18,213.65 (3/23/20 low).


NASDAQ Composite Index (COMPQ – 8,263.23)


After declining 32.60% from 2/19/20-3/23/20 COMPQ has rallied 30.97% to 8,684.91 (4/20/20). Failure to convincingly breakout above its key intermediate-term resistance at 61.8% retracement (8,613) from Feb-Mar 2020 decline coupled with 4/21/20 gap down warns of a near-term consolidation to initial support at 8,200-8,338 (4/14/20 gap up), and below this to 2,810-7,899 (4/6/20 breakout and 38.2% retracement from Mar-Apr 2020 rally). Secondary support is 7,519-7,657 (4/6/20 gap up and 50% retracement), and below this to 7,302-7,415 (4/1/20 low and 61.8% retracement). Violation of 7,302 warns of a deeper correction toward 6,985-7,170 (3/24/20 gap up) and then 6,686-6,631.42 (3/18/20 and 3/23/20 lows).


Source: Courttesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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