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June 29, 2020

Stock Market: momentum leads price, and momentum is turning more bearish

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The S&P 500 price index surrendered all of its June gains after failing to close the large downside gap made on 6/11/2020. This suggests that the Island Reversal top pattern (described here 2 weeks ago) may be still valid. The zones around previous pivot points at 3155.53, 3181.49, and 3233.15 mark technical resistance.

The S&P 500 low at 2965.66 on 6/15/2020 appears to be a critical pivot point. A breakdown below that low would confirm a short-term downturn, defined as a lower high and lower low. It also would violate the 50-day Simple Moving Average (the dark blue line). The S&P 500 already fell below the 200-day Simple Moving Average (the red line). A breakdown below 2965.66 could suggest risk to previous pivot points at 2766.64, 2727.10, or even lower. Reward/Risk calculations are not favorable.

Momentum oscillators, such as RSI and MACD, remain on short-term sell signals. Three weeks ago on 6/5/2020, we noted that momentum had "reached overbought levels." And two weeks ago on 6/12/2020, we noted that that momentum indicators "turned down significantly, flashing short-term sell signals."

Currently, the S&P 500 price index remains in a systematically neutral zone, slightly above its 50-day SMA, below its 200-day SMA, and with the 50 still below the 200. Note that a decline below the 50-day SMA now at 2980.07 would be systematically bearish.

The percentage of the S&P 500 stocks above their 50-day SMA has already turned bearish. This participation and breadth indicator broke down below its lows of May and June and below both the 50-day SMA and the 200-day SMA. Now at 47.49%, the majority of the S&P 500 stocks already are below their 50-day SMAs.

The NASDAQ Composite Index continues to demonstrate relative strength compared to the S&P 500. Momentum oscillators, such as RSI and MACD, have lagged price since 6/10/2020 and remain on short-term sell signals, however, suggesting bearish momentum divergence.

The cumulative daily net volume of advancing stocks minus the volume of declining stocks on the NYSE is weak, below both its 50-day SMA and its 200-day SMA. And with the 50-day SMA below 200-day SMA, the U-D Line is systematically bearish.

The cumulative daily net number of advancing stocks minus the number of declining stocks on the NYSE turned down on 6/16/2020 at a peak below its high on 6/8/2020. Last week, the break down below the low on 6/11/2020 on Friday 6/26/2020 confirmed a downturn in the short-term trend, defined as a lower high and lower low.

The number of net new highs on the NYSE has remained relatively subdued. Nevertheless, this indicator remains systematically bullish, slightly above its 50-day SMA and 200-day SMA, and with the 50 above the 200.

Both the Dow Jones Industrial Average and the Transportation Average closed below their previous closing price lows for June. Their lower highs and lower lows in June confirm short-term downtrends. Reversals of their medium-term Secondary Reaction rallies since March may be at hand. Currently, both Averages remain systematically neutral, now only slightly above 50-day SMAs, below 200-day SMAs, and with 50-day SMAs below 200-day SMAs.

Fundamentally, there are increasing doubts regarding a hoped-for economic recovery. The International Monetary Fund's World Economic Outlook Update on 6/24/2020 cut its global growth forecast to 4.9% for year 2020, down 1.9 percentage points below the April 2020 forecast. "The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast," the report said. (For the full IMF report, see:

Although some of the recent economic data show modest upturns, most of the data have been weak since March.

The Fed and all the major central banks have been doing everything they can to provide liquidity to preserve the financial system. The U.S. Federal Reserve increased its Total Assets by 86% over the past year. This massive flood of new liquidity has been an important driver behind the stock market bounce from the March low on 3/23/2020 to the June high on 6/8/2020. Although the Fed's Total Assets declined slightly over the past 2 weeks, it may be too soon to suggest any significant shift away from aggressively easy monetary policy.

Seasonal tendencies based on past market history can be somewhat useful but are not as powerful as momentum and trend indicators. There has been an upside market bias for the first week of June, but the remaining 3 weeks of June have been mixed. The first half of July has had a bullish bias, while the second half has been mixed.

An overabundance of conflicting news, opinions, and forecasts led to investor sentiment best described as confused in recent months. To avoid a confused mental state that comes from reading the news, we focus on actual facts that the markets themselves are revealing. As always, our first priority is to protect and preserve your capital. We carefully and continuously weigh potential rewards against potential risks.

The recent price recovery over 77 calendar days from 3/23/2020 to 6/8/2020 was much faster and larger than the majority of investors expected based on past patterns and put the market in an overbought condition. Market history suggests that it would be most unusual for a new bull market to start so soon after the damages sustained in March. Most recently, there appeared some new evidence that the 77-day price bounce may be about to reverse. Additional indicator breakdowns below June lows and the two SMAs would enhance the case for renewed caution.

Investor sentiment remains mixed. Sentiment became excessively negative in March, resulting in an extreme oversold condition that led to the recent oversold short-covering bounce lasting 77 days. Now, that extreme oversold condition has been alleviated as indicator readings moderated. Sentiment is a supplemental indicator that is less important than trend and momentum. Sentiment is mainly useful for counter-trend trading. Markets are complex adaptive systems that reflect the emotions of the crowd reacting to contradictory and incomplete information as well as changing decision rules. Prices tend to swing to emotional extremes of optimism and pessimism. When there is a great majority of bulls, few investors are left to buy, and rallies suddenly can fizzle and reverse. Conversely, when there is a majority of bears, few investors are left to sell, and short-squeeze rallies suddenly can appear seemingly out of nowhere--the bounce after the March 23rd low is a good example. Neutral and mixed sentiment tends to coincide with uncertain, indecisive markets.

$VIX, Volatility Index is above 50 and 200 SMAs, indicating a rising trend, which could be bearish for the stock market.

!NAAIM, The National Association of Active Investment Managers long-side exposure to US equity markets remains overbought.

!AAIIBEAR, the percentage of individual investors that are bearish (a contrary indicator) is above-average, indicating oversold sentiment.

!PCRATEQU, the Equity Put/Call Ratio (a contrary indicator) rose to an above-average level on Friday, but it has been below-average for most of the past 2 months. As of 6/8/2020, which marked the peak of the S&P 500 index, it had fallen to a low of 37, and it could take time to work off that extreme level of overbought.

The CNN Money Fear & Greed Index remains neutral. See

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Robert W. Colby, CMT,
is a consultant to institutional and private investors and traders, providing regular analytical reports, custom research services, and trading systems tailored to clients' objectives. Clients include the most successful traders and investors in the world. Robert is the author of The Encyclopedia of Technical Market Indicators, Second Edition, McGraw-Hill, 2003, which has become the standard reference for indicator and trading systems design. Previously, at several large Wall Street firms, Robert worked as a proprietary trader, technical analyst, and fundamental analyst. He also was adjunct professor at New York University and New York Institute of Finance, where he developed new courses on technical analysis and market timing.

Robert W. Colby is a Chartered Market Technician (CMT), an accreditation granted to members by the CMT Association ( after demonstrating professional competence and ethics over a period of many years. Robert has been a member since 1980, and he strongly supports the CMT Association's high standards. He also supports the The Technical Analysis Educational Foundation (, which works to have technical analysis included in the curriculum of major business schools. The CMT Association is the national organization of investment analysts, stock market analysis professionals, and certified market technicians in the United States.

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