US STOCK MARKET SETS UP TECHNICAL PATTERNS – PAY ATTENTION

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

The recent “melt-up” in the US stock market after a moderate downside price move in early May 2020 has set up a number of technical patterns that traders need to pay attention to.  This melt-up trend may continue for a bit longer, but price levels and actions are beginning to set up very clear patterns that warn of potential weakness in the future.

First, no matter how we attempt to spin the data, the US economy is very likely to fall into a moderate recession after the COVID-19 virus event has created a world-wide economic event and the recent riots and protests all across the US continue to disrupt and destroy property, businesses, and other assets.

It is almost like a one-two-three series of punches leading to a TKO.  We have the virus event, the stay-at-home orders, and now the riots and protests.  Recently, the National Guard has been called out to support local law enforcement and to protect people and properties. From our perspective, the situation is very far away from stable economic activity/growth supporting current stock price activity/levels.

We have been urging our friends and followers to be very cautious of long-side trades and to execute them with very narrow parameters, minor position sizes, and easy/tight targets and stops.  The reason for this is because we are not confident that the underlying global economic fundamentals support the current price trends and activities.  Yes, the US Fed is pouring trillions into the economy attempting to support the US and global markets, but the view from the ground level is very different from the Wall Street office on the 20th floor.

The GDP-Based Recession Indicator Index has risen to the highest levels since Q1:2008 as of April 2020 data.  If it continues higher with the May 2020 data point, we’ll have more evidence that the US economy has entered the early stages of an economic recession.  Remember, in early 2008, the US stock market had already begun to collapse more than 20% from recent highs.  Currently, the SPY is trading only -9.63% below the all-time high levels.  Our researchers continue to believe the US stock market is overvalued by at least 11% to 15% at current levels.

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