SP 500 Trading Strategy Summer 2020 1.0
MACRO VIEW
First thing is first, my macro view is bearish. The long term debt cycle is calling and will come to head this decade, real growth needs structural correction, zombie companies need to be shot in the head, governments need to evolve digitally and remove excess, monetary policy needs to shift money flows directly to consumers, manufacturing needs to come back to North America to provide employment. Short-term consumerism is going to be in a world of pain but long-term real living standards will start to rise again by the end of 2020. This is my macro view.
-Now lets shift attention to the short-term, being the summer ahead. I think the only real money making opportunity is going to be for timely traders. Anyone holding will be sitting through some very volatile swings.
SUMMER UPSIDE TARGET - SELL OFF WEAKNESS
-Currently we are in an uptrend channel, which looks like its heading to 3000-3100, but I think there is a very real possibility that we will be swinging down before then. All those thirsty bulls waiting for those final last points and all the bears lurking behind them might be sorely disappointed. But even if we do melt up to 3000-3100, I think the summer trade has now shifted favor to the bears, and those waiting for the perfect trade based on price targets could be missing out.
-I think we will hit 3000-3100, but will have to do a next leg down before reaching it. Why I think we could hit that range is because the sell off from 3100 to 2170 had a money flow divergence. As you'll see on my chart the initial drop off in the index from 3400 was supported by money flows up until the first bounce, but the next phase down was very panic driven with large price drops unsupported by the outflow of money. I think this section of the sell off begs for a correction.
THE RALLY
-Now, the initial bounce during wave 1 was a supported move. I believe that is when the smart money entered the market. I do not think that this move will be retraced during the next leg down until we have a break in the long term pattern, when the smart money once again enters with bearish intent.
-Following the initial bounce, there has been some major red flags based on money flow. (And note that I keep my money flow indicator (which I keep a high level of 50 to prevent it from having too many triggers.) The price move from 2600 to 2975 has a declining money flow. It currently stands as an almost 15% increase based on a MFI change of 64 to 47 - certainly not a sign of confidence for the bulls.
-The most recent move up from May 3 has shown an even starker divergence on the MFI. We've gone from 53 to 47 on the MFI with a price increase of 2770 to 2930. This calls for a very sharp reversal.
-Now we are approaching the highs. Let's consider the last 2 highs. We hit 2885 with a MFI of 60. Then we hit a new high of 2965 with a MFI of 60 again. Now we are reaching that old high with a MFI that will likely be lower than 60, which I think indicates a potential failure, although it is very difficult to time the market with money flows, its better suited for trend targets. Nevertheless, when you look at April 14th and April 16th, when the price broke the high based on a lower MFI it totally capitulated and re-tested the base on the move up to the April 14th high. Now the price is headed to re-test the highs of the rally with an even lower MFI. If it does succeed with some bullish momentum and covering early next week then I could expect to sell a fall to 2600s.
CONCLUSIONS
-So based on these views I would argue that betting on the melt up to 3100 is a very risky play with much more downside potential. By no means am I arguing the melt up cannot happen. I think 3100 will be reached before a major market shift, perhaps twice, but based on money flows (which like any indicator can produce false flags) of the entire rally as well as this increasingly low MFI level and rising price action, I'd say the market cannot support a sustainable higher high and we are reaching the tipping point. We have 40 more points to go before reaching the old high which had a MFI of 61, while the MFI reaching this high would be lucky to hit above 50. Melt ups are undoubtedly a contrarian price action to begin with so I won't be shocked to see it continue or happen, but what I am confident in is that it won't be sustained. All it would take is Sunday night trading to gap down on Monday and it would send many traders playing the upswing into denial then eventually panic. It would also break the trading channel we are in and I think unlock the bears to feast upon the fish swimming upstream, sending this rally back down to 2600-2450.
Overall, I think based on a general outlook we will see some kind of bearish wedge with around 2950-3000 as the top, and 3100 as the melt up reversal, which will come either soon or in the late summer, or perhaps both.
Also worth mentioning is that I believe this "phase" we have entered can be categorized as the 'complacency' phase of the emotional investing cycle. We are digesting extremely bad economic data but the market's thirst for returns which they can no longer find in bonds has sent them into equities. As the economic outlook deteriorates and this phase ends, we will enter the 'anxiety' phase of the emotional investing cycle and continue down from there. By the time we reach the 'panic, anger, and depression' phase, the events surrounding this will likely be The Fed's inability to combat inflation and stimulate real growth. My long-term targets are going to have to be adjusted according to the inflation levels, but I suspect the real gains of the 2020s will be terrible.
Good luck and like if you found this interesting/thought provoking!
First thing is first, my macro view is bearish. The long term debt cycle is calling and will come to head this decade, real growth needs structural correction, zombie companies need to be shot in the head, governments need to evolve digitally and remove excess, monetary policy needs to shift money flows directly to consumers, manufacturing needs to come back to North America to provide employment. Short-term consumerism is going to be in a world of pain but long-term real living standards will start to rise again by the end of 2020. This is my macro view.
-Now lets shift attention to the short-term, being the summer ahead. I think the only real money making opportunity is going to be for timely traders. Anyone holding will be sitting through some very volatile swings.
SUMMER UPSIDE TARGET - SELL OFF WEAKNESS
-Currently we are in an uptrend channel, which looks like its heading to 3000-3100, but I think there is a very real possibility that we will be swinging down before then. All those thirsty bulls waiting for those final last points and all the bears lurking behind them might be sorely disappointed. But even if we do melt up to 3000-3100, I think the summer trade has now shifted favor to the bears, and those waiting for the perfect trade based on price targets could be missing out.
-I think we will hit 3000-3100, but will have to do a next leg down before reaching it. Why I think we could hit that range is because the sell off from 3100 to 2170 had a money flow divergence. As you'll see on my chart the initial drop off in the index from 3400 was supported by money flows up until the first bounce, but the next phase down was very panic driven with large price drops unsupported by the outflow of money. I think this section of the sell off begs for a correction.
THE RALLY
-Now, the initial bounce during wave 1 was a supported move. I believe that is when the smart money entered the market. I do not think that this move will be retraced during the next leg down until we have a break in the long term pattern, when the smart money once again enters with bearish intent.
-Following the initial bounce, there has been some major red flags based on money flow. (And note that I keep my money flow indicator (which I keep a high level of 50 to prevent it from having too many triggers.) The price move from 2600 to 2975 has a declining money flow. It currently stands as an almost 15% increase based on a MFI change of 64 to 47 - certainly not a sign of confidence for the bulls.
-The most recent move up from May 3 has shown an even starker divergence on the MFI. We've gone from 53 to 47 on the MFI with a price increase of 2770 to 2930. This calls for a very sharp reversal.
-Now we are approaching the highs. Let's consider the last 2 highs. We hit 2885 with a MFI of 60. Then we hit a new high of 2965 with a MFI of 60 again. Now we are reaching that old high with a MFI that will likely be lower than 60, which I think indicates a potential failure, although it is very difficult to time the market with money flows, its better suited for trend targets. Nevertheless, when you look at April 14th and April 16th, when the price broke the high based on a lower MFI it totally capitulated and re-tested the base on the move up to the April 14th high. Now the price is headed to re-test the highs of the rally with an even lower MFI. If it does succeed with some bullish momentum and covering early next week then I could expect to sell a fall to 2600s.
CONCLUSIONS
-So based on these views I would argue that betting on the melt up to 3100 is a very risky play with much more downside potential. By no means am I arguing the melt up cannot happen. I think 3100 will be reached before a major market shift, perhaps twice, but based on money flows (which like any indicator can produce false flags) of the entire rally as well as this increasingly low MFI level and rising price action, I'd say the market cannot support a sustainable higher high and we are reaching the tipping point. We have 40 more points to go before reaching the old high which had a MFI of 61, while the MFI reaching this high would be lucky to hit above 50. Melt ups are undoubtedly a contrarian price action to begin with so I won't be shocked to see it continue or happen, but what I am confident in is that it won't be sustained. All it would take is Sunday night trading to gap down on Monday and it would send many traders playing the upswing into denial then eventually panic. It would also break the trading channel we are in and I think unlock the bears to feast upon the fish swimming upstream, sending this rally back down to 2600-2450.
Overall, I think based on a general outlook we will see some kind of bearish wedge with around 2950-3000 as the top, and 3100 as the melt up reversal, which will come either soon or in the late summer, or perhaps both.
Also worth mentioning is that I believe this "phase" we have entered can be categorized as the 'complacency' phase of the emotional investing cycle. We are digesting extremely bad economic data but the market's thirst for returns which they can no longer find in bonds has sent them into equities. As the economic outlook deteriorates and this phase ends, we will enter the 'anxiety' phase of the emotional investing cycle and continue down from there. By the time we reach the 'panic, anger, and depression' phase, the events surrounding this will likely be The Fed's inability to combat inflation and stimulate real growth. My long-term targets are going to have to be adjusted according to the inflation levels, but I suspect the real gains of the 2020s will be terrible.
Good luck and like if you found this interesting/thought provoking!
Penafian
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