Mr. Market: Major Reversal? 27.02.2021

Monthly and Weekly Analysis

The last 10 minutes of trading hours on Friday were so beautiful. Mr. Market seemed to send a message loud and clear that all major indices (SP500, DJI, Nasdaq and Russell) are heading for a reversal. All daily and weekly candles of all indices were happily setting for a continued bullish trend until the last 10-minute sell-off converted them into the reversal combos. Tough call.
Let’s explore the hypothesis step by step.

Monthly and Weekly

Nasdaq produced the most bearish combo on the monthly chart, a bearish Hammer engulfing a Spinning Top of January. The weekly candle confirmed the Bearish Engulfing of the previous week. These monthly & weekly hint for a great decline ahead.
Note that the weekly PSAR flipped to the dark side – it happened only twice in 2020, in February and August prior to sizeable corrections.

SP500 confirmed the Dark Cloud Cover of the previous week. The monthly candle shows a significant bearish pressure, but it is moderate compared to Nasdaq.

DJI showed some sort of a bearish Sandwich on the monthly and confirmed the reversal by a Spinning Top on the weekly. It looks like the lower prices are ahead.

Russell showed an increasing bearish pressure over the last 3 months and confirmed a reversal by Dark Cloud Cover on the weekly. It is also difficult to ignore a rather clean Head & Shoulders in weekly RSI.
The weekly RSI for all indices seem to be supportive of a further move down.

Daily

Nasdaq futures pierced through the Double Top neck line at 12727 and bounced back. The fact of piercing is not healthy and there is a high chance of follow-up. The daily RSI in both cash and futures follow the price. Note that daily RSI for all indices and futures moved below 50, indicating a bear market.

SP500 cash closed below Thursday low with a continuation candle, indicating further decline.

DJI produced two decisive Maribozu candles in a row. The second one as a confirmation of a strong Bearish Engulfing on Thursday. If it closes Monday with a third similar candle, it would make a Three Black Crows, a solid bearish combo with high probability.

Russell made a rather undecisive Doji after a strong Bearish Engulfing. Together with other indicators it could be considered as a pause in downtrend.

Long Term Forecast
I have been tracking two SP500 futures charts for the Bullish and Bearish paths and would like to share them with the comments. Based on recent developments in the Candles department, I thing that the Bearish projection has higher odds and I start with it.

Bearish Projection

I think that a major wave (1) completed a week ago and there are many supportive points. Moreover, I believe that the wave finished with an Ending Diagonal which would determine the behavior of the corrective wave. Possible targets for wave (2) in red rectangle:
1. 3225, the origin of the Ending Diagonal. Decline of 19%.
2. 3539, 0.236 Fib retrace of wave (1). Decline of 11%.
3. 2858, 0.618 Fib retrace of wave (1). Decline of 28%.

Bullish Projection
I originally made this chart on September 28, 2020 trying to project the major targets and reverse engineer the minor ones. So far, it worked like a charm, including the channel projection.

In order to continue on this path, the stock must not fall below 3668.00 (-7.4%) and should continue to stay within the long term channel. This would be the first level I will be watching very closely. If the futures bounce off 3668 in a motive fashion, I would expect it to move towards 4050-4200 area in the couple of months.

Summary: The last 10 minutes of Friday’s trading session led me to believe that the market has passed an inflection point and the odds are solid on the bear’s side. Candles of all major indices on all time frames seem to support the hypothesis and, depending on the bear’s appetite, SP500 could correct 7-28%. The next couple of days will be very decisive in determining the direction (there is always a chance for reversal) and the length of the correction which I view as very probable.

Happy trading!

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