S&P 500 and Nasdaq Weekly Charts Show Significant Downside Risk

You can call it the Corona Crash and it's only just begun. The S&P was in a sell zone when the high was set. The Nasdaq was above its sell zone.
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The S&P 500 ^GSPC and the Nasdaq Composite ^IXIC set their all-time intraday highs on Feb. 19 - just as the coronavirus began to spread worldwide. 

Sixteen trading days later these averages are in bear-market territory. I have often said that when a bull market is ending, the downside will be severe.

You can call it the Corona Crash, and it's only just begun. The S&P was in a sell zone when the high was set. The Nasdaq was above its sell zone.

The Weekly Chart for the S&P 500

Weekly Chart for the S&P 500

Weekly Chart for the S&P 500

Courtesy of Refinitiv XENITH

The 12x3x3 weekly slow stochastic reading is projected to decline to 49.36 this week from 67.16 on March 6. 

At the all-time high this index was above the 90 threshold, putting the S&P in an inflating parabolic bubble formation. 

This bubble popped, with the S&P falling into a bear market 26% below its all-time high.

The horizontal lines at the top of the chart are its quarterly and semiannual pivots at 3,103.0 and 3,303.4, respectively. The S&P stayed below its annual risky level at 3,466.5.

The parabolic bubble formation was a big warning and failure to hold 3,103 was the bear- market warning as the S&P did not have lower value levels.

With the S&P below its 200-week, the downside risk is significant. The horizontal line in the middle of the graph is its precrash-of-2018 high of 1,578. A decline to this level is a bear market of 53.5%.

The Weekly Chart for the Nasdaq

Weekly Chart for the Nasdaq

Weekly Chart for the Nasdaq

Courtesy of Refinitiv XENITH

The weekly chart for the Nasdaq is negative, with the index below its five-week modified moving average at 8,729.11. 

It’s above its 200-week simple moving average, or reversion to the mean, at 6,966.92.

The 12x3x3 weekly slow stochastic reading is projected to decline to 50.48 this week from 68.12 on March 6. 

At the all-time high this index was above the 90 threshold, putting it in an inflating parabolic bubble formation. 

This bubble popped, with the Nasdaq falling into a bear market 26% below its all-time high.

The horizontal lines at the top of the chart are its quarterly, semiannual and annual pivots at 8.860, 9,074 and 9,352, respectively. The Nasdaq was above these levels at its all-time high.

The parabolic bubble formation was a big warning. Failure to hold these pivots was the bear-market warning as the Nasdaq did not have any lower value levels.

If the Nasdaq fails to hold its 200-week, the downside risk is significant. The horizontal line at the lower quadrant of the graph is its precrash-of-2018 high of 2,861. A decline to this level is a bear market of 70.9%.

The bottom line is that if the Nasdaq stays above its reversion to the mean, look for the S&P to rebound back to its reversion to mean. But beware that when in a bear market investors and traders are selling on strength, not buying on weakness.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Monthly levels for March were established based upon the Feb. 28 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.