Convergence of key technical levels for SPX
Exogenous or external shocks such as the recent coronavirus are often unpredictable. It is the direct result of outside forces that is beyond the scope of normal conditions. This unexpected event can often dramatically impact the mindsets of investors and consumers leading to adverse economic conditions. These external shocks are often fluid and can be resolved quickly returning the market back to normal. However, external shocks can also escalate to extreme fear and irrational market behavior.
S&P 500 Index (SPX – 2,978.76) has quickly declined -414.76 points or -12.22% over the past week as well as key international equity markets also declining in similar fashion. Long-term US Treasury yields (10-year and 30-year yields) have fallen to historical lows. Commodities market (CRB Index) has recorded 4-year lows. The above macro conditions strongly suggest global risk aversion.
SPX market internals such as advancing minus declining issues have visibly diverged from its price trends. Investment sentiments such as AAII survey have turned negative but are not yet trading at extreme levels yet. SPX implied volatility (VIX – 39.16) have recently broken out and appears headed toward a retest of 48-53 corresponding to the prior highs associated with severe market corrections during 2010, 2011, 2015, and 2018. Volume has expanded rapidly in recent days as SPX is approaching the high-volume days associated with the late-Dec 2018 -20% SPX correction on the backdrop of recession fears. The above internal/sentiment conditions warn of a correction.
So, is the recent global market sell off signaling a more serious situation than anticipated? And, if so, will this lead to another economic crisis (i.e., global recession)?
Historically, external shocks tend to create very volatile market conditions due to the uncertainties surrounding the situation. However, the average market corrections are often short-lived and typically lasts no more than a couple of months to several months. Most corrections will end and the market in question resumes its primary and dominant long-term uptrend. Minor corrections are typically of the magnitude of 3-5% declines, deep corrections are 5-10% setbacks, severe corrections are 10-20% drops. Bear market declines are 20%-plus. Because external shocks are unexpected events, they often turn into severe corrections of around 10-20% decline and tend to be resolved rather quickly.
Enclosed below are SPX charts with updated technical supports from a monthly, weekly, and daily basis. The objective is to try to identify common technical support zones within the 3 major timeframes. Why? When technical support levels converge near the same general area on the daily, weekly and monthly charts they are technically significant. Also it is important to note that some technical indicators such as 30-week, 200-day, 30-month moving averages, 38.2% and 61.8% retracements, reaction price lows, key trendlines, technical patterns (left/right shoulders bottoms) are often important area of market interests as they tend to attract potential buyers. Enclosed below is a summary of the convergences of key technical support zones based on daily, weekly, and monthly charts.
SPX daily chart –
Support 2 = 2,729-2,746.5 (Jun 2019 reaction low and 61.8% retracement from Dec 2018-Feb 2020). A decline to 2,729 also equates to -19.59% severe correction from the Feb 2020 all-time high (2,393.52).
SPX weekly chart –
Support 2 = 2,729-2,746.5 (right shoulders of a complex 2-year head/shoulders bottom breakout pattern)
SPX monthly chart –
Support 2 = 2,824.5 (30-month ma and -16.77% from Feb 2020 all-time high)
Support 3 = 2,743 (2010 internal trend line and -19.14% from all-time high)