In the last six weeks the S&P 500 cash index has dropped more than 35% measured from high to low. This has been the fastest decline in the history of the stock market. The furious decline only put a temporary bottom in last Monday when the Fed announced unlimited QE and the two trillion aid package was signed into law. From the scope of the Fed actions and the fiscal policy response, you can tell that this coronavirus crisis is much bigger than the recent financial crisis in 2008. The S&P 500 cash index dropped 57% in 17 months during the 2008 financial crisis. What are the coronavirus crisis bear market’s duration and downside target?
Before we answer that question, let’s look at the previous notable market selloffs. In the 1982 – 2000 bull market, there were only two times that the S&P 500 cash index interacted with the 200-week moving average. Once in October 1987 and once in October 1990. Both times the S&P 500 index didn’t close below the 200-week moving average. It first closed below the 200-week moving average in March 2001 after the dotcom market top. In the 2009 – 2020 bull market, once the S&P 500 index climbed above the 200-week moving average in November 2010, there were three times that the S&P 500 interacted with the 200-week moving average. Once in October 2011, once in February 2016 and once in December 2018. Each time, the 200-week moving average acted like precise support and the S&P 500 index bounced sharply from it.
In order for the stock market to be in a secular bull market like the one occurred in 1982 to 2000, it has to stay above the 200-week moving average, which is roughly a 4-year average. Now the S&P 500 cash index is 13.65% below its 200-week moving average, this puts the February 2020 top in a similar position such as the dotcom 2000 top and October 2007 top. That being said, the S&P 500 cash index has the potential to decline 50% to finish the bear market. The likely bottoming time could be October 2020.
Fundamentally, there has to be a medical solution to the coronavirus crisis or the virus spread has been contained before the bull market can start. The monetary and fiscal policy will help the stock market to ease the pain while the medical community is desperately trying to find solutions. So we are watching the developments in the hunt for medical solutions while having the technical price and time targets in place.
In short term, NASDAQ was able to make an outside reversal week last Friday by closing above the previous week’s high. The DOW and S&P 500 both traded above the previous week’s high, but failed to close above it. So the three main indices presented a mixed picture with NASDAQ being the strongest.
On the S&P 500 daily chart, the daily cycle low was made on March 23rd. It is 4 bars into the daily cycle now. If this daily cycle low is also a weekly cycle low, then the daily cycle low to high phase will last 6-12 days. It needs to trade above 2637.01 to form a weekly cycle low. Once the weekly cycle low is in place, the daily cycle will advance as bullish cycle.
The 18% advance last week is a classic bear market rally. If you want to trade those bear market rallies, you have to be very fast to take profits. This is not an environment for long term investment yet.