Here’s Where the S&P 500 (SPY) Should Bottom

After plummeting near (-35 percent) from its highs, the  S&P 500 (NYSEARCA: SPY) bounced back from deep in bear market territory cutting the losses to (-22 percent) off highs on March 26, 2020. Each giant price swing or market halt somehow gets attributed to some news or event. The narrative always gets curve fit in a manner that may make sense that day but falls apart a few days later. All the conjecture boils down to answering a simple question, where is the “bottom” of this market selloff? The reality is that market bottoms only materializes in the “rearview mirror” just as how a black swan event is always explainable in that same rearview mirror, after the fact. The best we can do is hypothesize the probably bottom levels moving forward. Let’s take a shot.

Black Swan Timeline Narrative

The SPY hits new all-time highs on Jan. 22, 2020, as the spread of coronavirus in China makes headlines. The SPY takes a steep drop from $332.50 to gap down to $322.66 lows on Jan. 27 in reaction to China’s l lockdown of the city of Wuhan, composed of 11 million people. Markets bottom at $320.73 lows and rally on Jan. 31, as U.S. cuts off borders to any noncitizens flying in from China. Coronavirus death toll in China rises to 213. SPY shrugs off coronavirus headlines throughout early February power grinding up to new all-time highs at $339.08 on Feb. 19, 2020. SPY slowly drifts lower and gaps down to recent lows at $321.24 on Feb. 24, as CDC warns Americans against travel to South Korea where cases jump to 893. The death toll in Wuhan climbs to 2,600. Credit markets exhibiting liquidity problems as 10-year Treasury yields to collapsed under 0.70 percent. The SPY desperately attempts to regain the $324.28 Fibonacci (fib) level but fails miserably collapsing to $311.69 on Feb. 25, as the National Center for Immunization and Respiratory Diseases (NCIRD) states that the spread of coronavirus in the U.S. is not a question of “if” but “when”. The SPY exceeds three percent price swings causing panic selling in the SPY reaching lows of $285.54 on Feb. 28, 2020. The SPY has been hitting three percent daily price swings for six days as volatility climbs. SPY rallies to $313.84 the next two days as the Federal Reserve steps in on March 3, with an emergency rate cut of 50-basis points causing markets to briefly rally and then collapse again. On March 9, 2020, Saudi Arabia and Russia engage in a price war as oil prices collapse over 30 percent to $30-per barrel compounds with Italy’s 60 million residents under lockdown triggers a seven percent drop in the SPY.

COVID-19 Hits Home

The National Basketball Association (NBA) suspends the season as Utah Jazz player tests positive for COVID-19 on March 10^th followed by the World Health Organization (WHO) officially declaring COVID-19 a pandemic. New York’s Governor Cuomo bans all gatherings of 500 people or more as the coronavirus pandemic hits home triggering the SPY to collapse 9.5 percent to low of $247.68 on March 12^th. President Trump declares the coronavirus a national emergency on March 13^th as SPY rallies to highs of $271.48 before collapsing the next six days to lows at $218.26 on March 23^rd as the Fed pulls out all stops instituting quantitative easing (QE4) to include treasures and corporate bonds and fiscal stimulus. SPY rallies to $262.80 on March 26, as the Senate passes the $2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES) Act bill as it heads to the House for voting. The Federal Reserve pledges “unlimited” asset purchases to shore up credit markets as its balance sheet spikes through $5 trillion. U.S. Jobless Claims spike to 3.28 million, as the SPY shrugs it off as it rallies nearly 24 percent off lows. The European Central Bank (ECB) follow suit with their QE. The U.S. becomes the nation with the highest cases of COVID-19 in the world surpassing China.

SPY Chart Narrative

Now that we have the complete curve fit narrative, let’s use the rifle charts to analyze the weekly and daily time frames to interpret price action for future outcome scenarios trajectories. The key day that triggered the black swan event on the charts was Feb. 25, 2020. This was when the “buy the dip” reaction vaporized as the SPY rejected off the $324.78 fib which also aligned with the 5-period moving average (MA). The rejection caused the stochastic oscillator to slope down through the 80-band causing selling pressure to compound. This simultaneously triggered the weekly stochastic to form a mini inverse pup falling through the 80-band. The double mini inverse pups are called “vipers” like poisonous viper fangs coming down. Each drop coils off the daily or weekly lower BBs back to the daily 5-pd MA and reject again making lower lows and lower highs as indicated by the falling daily 5-pd MA. The daily candles finally formed a market structure low (MSL) at $218.26 followed by the MSL trigger at the $244.11 fib with upside to the weekly 5-period MA at $266.60 to $271.46 fibs before a reversion pullback to retest the daily 5-period MA near the $244.11 MSL trigger level. From here a make or break formation resulting in a fuller upside oscillation on the daily stochastic towards the $291.09 and $305.48 fib targets or a breakdown back through the MSL at $217.67 fib, $210.62 and $193.71 daily lower BBs/fib would be the three potential bottoms. The narrative would circle around the systemic risk from COVID-19 relapse, credit events, delays with implementing the CARES Act in April 2020, after pension funds finish their $190 billion of rebalancing by the end of March.