Weekly Chart Review
Well, that escalated quickly...
Disclaimer: the following analysis was written on Sunday afternoon, March 12th just two days after the failure of Silicon Valley Bank (SVB) on Friday, March 10th. History would suggest that it is difficult, if not impossible, to determine today the exact ramifications that SVB’s failure may have on financial markets. With that said, the following analysis is written from a technical standpoint (i.e., what are price movements through the close of business on Friday telling us) and does not attempt to assess the exact impact that SVB will have on financial markets. Events like this (SVB), tend to have binary outcomes. For example, should the FDIC (or various other government entities) guarantee all deposits at SVB and potentially other banks that may run into similar problems, we could see a massive rally this week as the fear of contagion has been mitigated. Alternatively, if the FDIC is unable to provide this level of support or is unable to find a potential buyer for SVB, we may see additional bank runs at other non- “systemically important banks” across the US. In this scenario, financial markets may trade significantly lower until the government’s hand is forced into action or the market believes that potential contagion has been ring-fenced.
Last week, I focused on one index, the S&P 500. I did that because we had what appeared to be conflicting reports depending on if you were looking at the Heikin Ashi bar chart or the “normal” candlestick chart.
My summary statement regarding the Heikin Ashi bar chart was:
Despite a positive price week for the S&P 500 Index, the Heikin Ashi candles indicate that the price trend is still lower.
My summary statement for the “normal” candlestick chart was:
Last week’s price action appears to be what is often referred to as a “bull hammer”. Typically, a “bull hammer” signifies a positive trend going forward over the short-term.
I concluded last week’s piece by noting:
I think this is a critical week for the S&P 500 Index. If we close higher than last week, you have to start thinking about 4,165 as your first target. Alternatively, a bad outcome becomes one that closes below the blue trend line. If that happens, we’ll examine next week where we go from there, but the bias will be lower.
One week later, where do we stand?
Let’s start by looking at the Heikin Ashi candle chart.
The first key thing to note is that the trend did remain lower, as suggested last week. Additionally, in last week’s piece, I made reference to the fact that we didn’t have an “upper wick/shadow” on the most recent bar. You can see below what I said last week regarding this point:
Additionally, note that typically before a reversal in price, the Heikin Ashi price bars will indicate this by having an “upper wick” or “upper shadow” the week or two prior to the reversal taking place. This last week did not register a “upper wick/shadow” thus further suggesting that the trend is lower.
Fast forward and note the “upper wick/shadow” on the most recent bar. While this doesn’t necessarily guarantee a reversal this week, it does set the stage for one to take place within the next week or two.
Take note of the red text box in the chart. This is the most recent and most similar reference point relative to last week’s candle. This suggests that a further downtrend is not out of the cards despite having an “upper wick/shadow” last week.
Let’s see if the “normal” candlestick chart can give us any further insight into what to expect this week.
Last week, I said:
Alternatively, a bad outcome becomes one that closes below the blue trend line. If that happens, we’ll examine next week where we go from there, but the bias will be lower.
Note where the S&P 500 closed relative to the blue line in the chart below. I would classify that as a “bad outcome”.
Further, I suggested if the “bad outcome” were to occur, the bias going forward would be lower. To get a sense of how much lower, let’s turn to the daily chart (see below).
The daily chart shows that we have recently established a Head & Shoulders (H&S) pattern. The “measured move” for this H&S pattern calls for a target price of ~3,640 or -5.7% lower than Friday’s closing price.
In a situation like this, it is not uncommon to see a rally back to the neckline before heading lower again so watch for that potential outcome over the next week or two.
Conclusion
The S&P 500 was down -4.55% last week. That is a sizable move for one week. The move lower was driven by FOMC commentary (higher rates for longer) and the failure of Silicon Valley Bank.
Given the magnitude of the decline last week, I wouldn’t be surprised to see a short-term reflexive rally this week but that is 100% contingent on how the Silicon Valley Bank situation plays out. With that said, for it to be a meaningful reversal (i.e., one that has legs to continue), the S&P 500 has to start by closing above the blue trend line two charts above. Further, the S&P 500 needs to negate the current H&S pattern by closing above the right shoulder. If these two things do not happen or if the blue trend line becomes resistance, the ~3,640 target noted above is a very real possibility in the short term.
Given the negative headlines and negative price action on both charts (Heikin Ashi & candlestick), my bias is to believe that the path of least resistance is lower over the short to medium term. At a minimum, I would wait for a “green candle” on the Heikin Ashi weekly chart before I considered getting long again.