200 WMAs & Retracements

Is 3500 on the SP500 inevitable? And what's beyond it? Another 4% from here and we reach 3500, coinciding with the 200-week MA as well as the 50% retracement of the rise from March 2020 bottom to this year's high. The relevance of such confluence is further reinforced with NASDAQ100 and DOW30 about 2% away from their respective 200-WMAs. 

As certain as the above analysis appears to be, you have to be careful if you're shorting on leverage. Recall the analysis, flagging the 200-WMA target back on May 12, highlighting the fact breakdowns below the 100-WMA lead to swift continuation down to the 200-WMA at each of the 4 occasions over the past 15 years. There was, however, one slight difference: The break below 100-WMA in summer 2015 was not followed by a break below the 200-WMA until February 2016…and even that was not a break but a “touch”.

Why I bothered to flag that minor exception ?

Simply put, anyone reading that May 12 chart, would have assumed that the break of 100-WMA would imply an immediate resumption of selling down to the 200-WMA. And just as that was not the case in 2015, it was not the case these past 3 weeks. Anyone who had shorted SPX on the week ending May 13t, would have been massacred by a 10% rally in the index, followed by a 13% drop in the ensuing 2 weeks. 

I don't want to belabor the point on moving averages, rebounds etcs, but it is essential warn about these recurring patterns, which may appear valid and powerful, but must be flagged with details and possible diversions. 

So what does it mean for next week?

Next week will lbe business as usual. Bank of Japan gets off with buying more bonds to cap their 10-yr yields at 0.25% at the expense of a 137-bound USDJPY. Fed Chair Powell will testify to Congress on Wednesday, with plenty more time (and less pressure) to convince them inflation is more of a priority for their constituents than tumbling stock/bond/crypto portfolios and soaring mortgage rates.

Speaking of Cryptos, Bitcoin has 3 days prevent a close below its 200-WMA, a moving average coinciding with crucial bottoms and rallies over its 13-year life.   

As tempting as it may be to want go short SPX here at 3685 to target the 3500 (confluence of 200-WMA and 50% retracement), I am anticipating a bounce to start building next week into month-end. This may take us to as high as 4000. If instead, more selling ensues and we reach 3500s, then those who missed the drop, may embark on another bear-market rally. 

Click To Enlarge