The Bulls are on the Ropes Again

The collapse of the Silicon Valley Bank (SVB) put in evidence the weakness of the Bulls. It's highly likely that we will continue to see a high volatility scenario at least during the next couple of weeks. If we compare the current levels of the most important indexes against the high of Jan/2022, the losses are still considerable:

What to Expect?

The levels of supply increased dramatically last Friday Mar/10. The numbers of the Monthly New Highs - New Lows (NH-NL) are similar to the ones seen during the last part of Sep/2022 when the S&P 500 was close to reaching a bottom. The important part is whether the index will hold above 3,800 or not (yellow highlighted area). If that support is broken, the next strong support is at 3,600 (red highlighted area).

The story that the weekly chart is tracing, drastically changed in two days. When the scenario is bullish, the index keeps going up, or at least has a limited decline when there are important catalysts like the one of SVB or the debt-ceiling crisis. Now, instead of monitoring if the index breaks past 4,150 the most likely scenario is that the 3,800 support will be tested.

If we zoom in to the daily chart of the S&P 500, every time the index gets to its oversold zone (-3 Keltner Channel or below, yellow highlighted areas), there has been at least a short-lived relief rally. This behavior started with the Bear Market of 2022, it will be time to see if what has happened during the last 15 months, keeps happening now that we are back to the daily -3 KC.

The important milestones for the Bulls (4,150 and 4,350) seem to distant and are unlikely to be hit during the trading week of  Mar/13. If we take the last 3 daily bars of the S&P 500 they are long bars,  closing at their lows. Taking SPY as a proxy of the index, the volume on Friday was around twice the normal volume of the ETF, translated into simple words, there is panic and people are dropping fast their stocks.

Under the current circumstances, some people might be tempted to buy more, to average down the existing losses or to buy a company that was cheap and now is even cheaper. That is a recipe for failure, there is a reason that those stocks are falling, and even if you are lucky and they have finally reached a bottom, that doesn't automatically mean that they will start to rally.

General Electric (GE) at some point was one of the most admired companies in the world. There are multiple books about Jack Welch, who was the CEO of the company during the years when the stock was performing at its best. In Aug/2000 the price of the stock reached a high at 377.69. After that, the price of the stock collapsed, we are in 2023 and the stock hasn't recovered yet (monthly chart below). Whether the stock will ever be at 377 becomes irrelevant if you have to tie your money to that single stock for almost a quarter of a century.

Summary

The Market gave its verdict, a powerful multi-month Bull Market isn't in the cards yet. At some point the Bulls will be in control again, but we could still be weeks or months away. The Market direction will depend a lot on how the powerful negative catalysts are handled during the next few weeks. The fear of contagion of the collapse of SVB, the debt-ceiling crisis, the untamed inflation, the Ukraine war, the tensions with China, they all generate some level of supply. The Bulls haven't been able to create a sustainable rally that absorbs that supply and starts breaking significant resistances.

I'll be on the sidelines while this hurricane passes. There are some types of traders that will benefit from the increased volatility or the sharp declines. If your trading plan requires that kind of environment, this could be your moment. Otherwise, remember, it's not mandatory to be buying and selling all the time. Manage your risk, survive this harsh Market, eventually the conditions will improve.