In this week’s Technically Speaking, I wanted to review Paul Tudor Jones’ 10-rules and how to navigate the market for the rest of 2020. Due to a small surgery, I am out of commission this week, so I had to write this article on Saturday. The data is as of Friday’s close, but given we are looking at weekly and monthly charts, it doesn’t change the analysis.
As noted in “The Sell-Off Is Overdone,” on a very short-term basis, the recent correction has played out much as we suggested in the middle of August.
Over the last couple of weeks, we have been discussing the ongoing market correction. As shown below, the sell-off has been orderly and not one of a “panic” induced decline.
The market did retrace from the top of the 2-standard deviation range to the bottom, which is part of a healthy correction process. As we noted last week, the correction also aligns with the historical weakness seen in September and October, particularly in years preceding an election.
SPX Daily Chart
“While the sell-off in the market has gotten overdone short-term, we still suggest using rallies back to the 50-dma to rebalance portfolio risks. Look at the first chart above. The market is currently in a very defined downtrend. Friday’s march failed to break out of that resistance.
In the chart below, we see the market rallied back to the previous consolidation lows with the 20-dma approaching a cross of the 50-dma. Such would suggest more downward pressure on prices short-term. The 200-dma is roughly 7% lower from Friday’s close.
If the market can break above resistance on Monday, clear the 50- and 20-dma’s, then old highs should not be an issue.
SPY Daily Chart
But what about for the rest of 2020. For that, we need to look at weekly and monthly charts for better understanding.
A Look At Weekly Data
It is essential to understand that time-frames are important in analysis. If you are a day-trader, you can skip to the bottom of the article. However, if you are a longer-term investor looking to grow capital and manage risk, weekly analysis becomes more beneficial.
The reason we look at weekly data is that it smooths out the day-to-day price volatility and tends to reveal overall market trends more clearly.
S&P 500 Weekly Chart
While the market is working off some of the more extreme overbought conditions, it remains 2-standard deviations above its 200-week (4-year) moving average. Even a correction back to the 52-week (1-year) moving average still requires another 7% decline from current levels.
It is also important to note that relative strength has negatively diverged from the market, going back to the beginning of 2018.
The still overly extended market from long-term means with declining RSI suggests investors should remain cautious over the remainder of the year and manage portfolio risk accordingly.