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U.S. Stock Prices Are Ignoring The Economic Meltdown

By Chris VermeulenStock MarketsMay 10, 2020 12:07AM ET
www.investing.com/analysis/us-stock-prices-are-ignoring-the-economic-meltdown-wait-for-it-200524140
U.S. Stock Prices Are Ignoring The Economic Meltdown
By Chris Vermeulen   |  May 10, 2020 12:07AM ET
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Many months ago, our research team suggested any future collapse in the global markets would likely prompt a global capital shift in how capital identifies and is deployed for ROI. We’ve continued to suggest that the more mature, global economies will become beneficiaries of any massive global collapse event and that capital will actively seek out security and safety while attempt to attain moderate returns. 

In 2019, we predicted a major Super-Cycle event would take place on or near August 19, 2019. We believed this event would prompt a major downside price rotation that would prompt a shift in how capital is deployed throughout the world’s financial markets. At that time, and still, we believe a long-term price cycle event is taking place which will prompt a deeper price bottom event that will likely complete near August or September 2020. This raises an interesting setup related to Technical Analysis for skilled traders…

If our analysis is correct, the Q2 and Q3 global economic data will be very distressing and likely prompt a continued downside price contraction in stock price levels and valuations. The disruption to the global economy has likely shaved 5% to 15% (or more) off total global GDP output for this year. Still, the US Fed and global central banks have poured more and more capital into the markets attempting to front-run this contraction in the global markets. We believe this “reprieve” in selling is likely temporary right now. The broader, longer-term, price cycle we’ve identified it still taking place and will likely prompt a deeper price bottom in the global markets before the end of 2020.

The one aspect of recent buying that we find rather interesting is that the NASDAQ (NQ) is really the only US market sector that is outperforming all the other sectors. This suggests that the US and global investors are piling into technology, biotech, and other NASDAQ symbols expecting these segments of the US economy to outperform the others. This is one component of the “capital shift” we have been warning investors about.

When the crisis event begins to unfold, capital (cash) will seek out and identify various opportunities as global markets and regional market segments shift from overvalued to undervalued – from risk to opportunity. We believe this is happening right now in the NASDAQ (NQ) and we believe the opportunity investors have piled into recently may turn into renewed risk in the near future as Q2 and Q3 economic data pushes reality into the markets.

Daily Comparison Chart shows the ES, YM, and NQ

This Daily Comparison Chart shows the ES, YM, and NQ in Log scale and highlights the collapse event for all three major indexes (almost in unison) as well as the incredible upside price rally in the NQ (RED) compared to the ES and YM. It is fairly easy to see how the NQ (RED Line) rallied over the past 30+ days much more efficiently than the ES and YM levels. As skilled traders were seeking opportunity, they identified the NQ as the best opportunity to deploy their capital.

Daily Comparison Chart ES, YM, and NQ
Daily Comparison Chart ES, YM, and NQ

Yet, if our analysis is correct and a deeper price low will be necessary to complete the broader price cycle setup that is taking place, this also means the recent opportunity in the NQ may turn into excessive risk if the markets suddenly turn downward – targeting our predicted deeper price bottom.

Weekly Comparison Chart shows the ES, YM, and NQ

This Weekly Comparison Chart shows the same three US major indexes and highlights previous price high levels which acted as resistance in the past. Both the ES and YM are currently trading below these resistance levels. The NQ is trading well above the resistance level (red). This continues to suggest that skilled traders have piled into the NQ rally expecting it to continue to outperform the S&P and Dow Jones in the future.

Weekly Comparison Chart ES, YM, and NQ
Weekly Comparison Chart ES, YM, and NQ

Weekly Custom US Index Chart

This Weekly Custom US Index chart helps to paint a very clear picture of the price trend and support/resistance levels that are active within the markets. In this chart, you’ll see many aspects of advanced technical analysis that helps us to determine where and when certain types of price action may take place. One of our tools is the Fibonacci Price Amplitude Arc technique – which attempts to deploy the Fibonacci price theory based on a price trend frequency/amplitude basis. This means each major and minor price trend (up or down) generates its own frequency/amplitude levels which project out in the past/future as key trigger levels for future price setups (tops/bottoms/rotations). We’ve also drawn a Std. Deviation Pitchfork across the 2018 top and bottom to highlight 1.0 and 2.0 Std. Deviation ranges related to current price peaks and bottoms.

As you can probably see from the chart, the deep lows in 2020 touched a broad Fibonacci Price Amplitude Arc registering a 2.618 expansion (highlighted in BLACK). Price has, subsequently, rallied back to the 1.0 StdDev lower price range on the Pitchfork. Additionally, there is a very important resistance price Arc that is setting up from the December 2018 price lows (highlighted in CYAN). Lastly, another major price resistance Arc originating from the 2016 lows aligns very closely with current price levels (highlighted in YELLOW).

Our researchers have identified a price inflection date trigger somewhere between May 8th and May 12th which we believe will prompt the start of a new trend or trend reversal trigger. We believe this inflection point suggests a bigger move will initiate near or shortly after this inflection point date. These types of inflection points typically result in larger volatility and/or broad price trend moves as they represent price breaking through resistance, support, or some major barrier in price. The energy it takes to break through these barriers translates into increased volatility and bigger price moves typically.

Weekly Custom US Index Chart
Weekly Custom US Index Chart

Currently, because of the technical setups we see that are about to trigger, we are very cautious in terms of taking unwanted risks in the markets related to trades. These inflection points could prompt a very big upside or downside price move within the next 5+ days and even though we believe the markets will attempt to move lower in a process that completes the deeper downside bottom formation, a “washout high” price rotation may occur as price reaches and breaches this inflection point.

In our view, it is better to wait for the market to confirm trends once this inflection point is processed to determine where the next opportunity for any new trade will present itself. As we’ve tried to highlight within this article, even though the NQ appears to be rallying back to near all-time highs, the major markets have set up a completely different set of technical analysis outcomes that suggest Q2 and Q3 weakness will likely prompt a deeper bottom pattern in the future.

The one thing we are certain of is that capital has already entered the “capital shift” process we have been suggesting over the past 24+ months. Capital will continue to roll into and out of various US and global market segments seeking safety, returns, and opportunity while attempting to avoid risks. We feel the US markets are very close to another topping event based on our research and believe waiting for clarity right now is the best decision skilled traders can make. One way or another, the market will tell us what to expect after breaking past this inflection point.

U.S. Stock Prices Are Ignoring The Economic Meltdown
 

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U.S. Stock Prices Are Ignoring The Economic Meltdown

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Comments (12)
Nicolaas Ferreira
Nicolaas Ferreira May 12, 2020 12:10PM ET
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You don't know what you are taking about. Guessing until it happens. I have followed your articles.
Micky Mcfly
EvenSteven May 12, 2020 6:53AM ET
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Great article. How long can this charade really go on? It is like we are living in the Matrix. And I don’t like it ...We need a Neo figure to break us out to normality.
ash ash
ash ash May 11, 2020 2:29PM ET
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Like average fan ....change is mind every other week.
Kevin Tortoise
Kevin Tortoise May 11, 2020 4:24AM ET
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Why are all the commentaries published on this website so poorly thought out? Every article is total garbage.
Irvin Mermelstein
Irvin Mermelstein May 11, 2020 12:10AM ET
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Excellent, clear thinking. I suggest the market is having a difficult time translating information into stock valuations because so much of the information flowing into the market is false. This market looks like Wiley Coyote just after he overshoots the cliff, looks down and finds no support. The impacts of the coronavirus on public health are barely first being felt, yet the market seems to be pricing in the end of the pandemic. As you say, I'm not chasing this market.
Micky Mcfly
EvenSteven May 11, 2020 12:10AM ET
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It is rigged. Only moves acc to sentiments in the market. Retailers net short it goes higher to steal more money. It is not real, everything is fake
Eric Erlandson
Eric Erlandson May 10, 2020 10:59PM ET
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Great article! I enjoy your analyses, Chris. I see that you pushed the forecasted deeper bottom out a couple months from a previous analysis. What preempted ths adjustment?
Randall Paul
Randall Paul May 10, 2020 10:50PM ET
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this is more than Fed pumping money if you look at the indices across the board they are all choreographed like a beautiful ballet. this is all planned and there are big boys behind these moves. I am sure world leaders big banks and corporations have had a behind the scene meeting . makes sense to me
fabrizio xx
fabrizioxx May 10, 2020 10:50PM ET
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it's clear Fed alone can't pump the market neither the Big Banks hasn't the liquidity therefore they are agree
cb cb
cb cb May 10, 2020 8:58PM ET
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Your past 3-4 articles said your research conclusion is a deep correction is coming, no question about it. Your current article says that the next inflection point may be a setup for a move higher of lower?!?
Thomas Riverton
Thomas Riverton May 10, 2020 5:39PM ET
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Anyone looking at charts for direction in this market needs to have his head looked at
James Wellington
James Wellington May 10, 2020 4:13AM ET
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How much Fed can you price in? We're looking at $13T in stimulus vs 2019's total retail revenue of $3.4T. I'm lost in speculation how much of this will go into in the economy and how soon.
Peter Trade
Peter Trade May 10, 2020 4:13AM ET
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Imo you shouldn't mess up this with structures in the indices - A decline of major proportion is "programmed" into business allready. The market i forward looking. That's why we had the initial huge decline to around SP2200 starting 2 1/2 months ago. By that time the economy wasn't affected that hard from the Corona crisis.
Dizzle TheRizzle
Dizzle TheRizzle May 10, 2020 4:13AM ET
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Peter Trade if that was true we should have priced in the current market 18 months ago too. Instead we print money.
Irvin Mermelstein
Irvin Mermelstein May 10, 2020 4:13AM ET
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The market has priced in a scientifically bankrupt model of the coronavirus premised on the utter falsehood that the "worst is over." The virus will prove that untrue, and quickly. This virus doesn't care if investors don't believe in it or underestimate its destructive nature. FEMA told the WH last week that by June 1--three weeks away-- we will have 200,000 new cases PER DAY, a rate that will then start doubling. We have a 6% rate of death for positive cases. So, that's 6 million new cases already expected in June, and over 300,000 deaths. The virus is going nowhere, so over the course of the next 90 days or less, we should see the death count go over 1 million. That's based on FEMA's numbers. The market appears to have priced in a return of 75% of the unemployed to their previous jobs. That's Tulip Bubble kind of thinking. All sentiment; no data. Every market before this has followed employment up and down. So will this one.
 
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