What happened with the stock markets?

In this article, we will take a look at the technical setups that led to a stock markets pull back

If you trade the market no matter you are a forex trader or a stock trader, stocks Indices are instruments we all watch in a search for a market correlation and good entry point for risk-off and risk on instruments. You are also aware that technical analysis is key for good trading and timing, place of entry, exit, stop loss and take profit. So did the technical analysis gave us warning signs about incoming stock markets pullback? Let us find some answers.

By looking at the long-term monthly chart we can see that the SPX (S&P 500 Index), has extended higher, from the only longer congestion zone of the 1989-2020 bull run, 2000-2009 (indicated by a rectangle on the chart) and reached 161.8% Fibonacci extension 3183 level and beyond with momentum overthrow to 3400. We also saw a large broadening wedge which led to a huge swing down from 3400 to 2300 a new rising channel floor. And we had a huge negative RSI divergence. So yes technical analysis warned us about incoming pullback from 3200-3400 zone. The magnitude of a pullback was also expected, taking into account a huge 5 waves swing up from 2009 to 2020 accumulating the 405% gain!

Even if we look at the parabolic nature of this pullback, why do we call it a pullback, not a crash? Because it has fallen “only” 40% off the high in terms of a previous 406% gain. Is this a reason to spread market panic? No, it is a usual market correction of a huge upside impulsive move and even if it not seen as this parabolic in nature in the history of the markets.

SPX long-term market chart — SPX 40% correction not a “crash”

Face it trading has changed in the past 5 years so we are experiencing larger momentum moves and larger swings as we have more “algorithmic” traders, that is why parabolic swing down, which seems not yet over and the next week will bring key long-term support tests. We had also VIX (volatility Index) giving us a warning that the top is in place, with positive divergence comparing to the 2018 low 10 level. Now it is reaching an all-time high 80 level which is also a warning that this swing down is maybe an overstretched.

VIX volatility Index monthly chart — VIX from 12 to 80 in three weeks

Last but not the least US Treasury 10 Year notes had the same “ride” as stock markets from 2009, which is almost certainly not a normal situation because they should have been the risk-off instruments and not a risk on instruments, so they were practically calling an SPX correction as lot of investors were buying them steady in 2016-2019 sideways upside channel swing. It is indicated in the chart by the vertical lines and a wedge.

10 YR US T-notes — US 10Yr T-notes long-term uptrend channel

Pay a close attention to technical analysis an Intermarket correlation if you are a trader. Using technical analysis skills in trading is no longer just optional it is a must if you mean to be successful in this business

We have used the combination of the top-down trading analysis to get these key levels explained in the charts.

Happy trading! (click on the chart to enlarge it)