(click on the chart to enlarge)
Although the long term monthly price trend remains to be positive, but that doesn’t mean there are no headwinds in the near term that could cause the market to go lower. One of these headwinds is the disappointing March non-farm payroll number. In the month of March, only 126,000 jobs were added versus a consensus of 247,000. The other headwind is the strength of the US dollar. The latest ISM index fell 1.4 points to 51.5 due to weak exports caused by the strong dollar. The 51.5 level is below the consensus forecast of 52.5, and it hasn’t been at this level since May 2013. The impact of the recent strong US dollar could also reveal some surprises as another earnings reporting period is about to start. Some companies have already revised their earnings forecast downward to prepare the market to deal with declining earnings. Therefore, the market will likely be focus on operating margin and profit margin to get a sense on the full impact of the strong dollar. More importantly, the market will be focusing on the companies’ forward looking statements to gauge their level of optimism on the economy.
The weekly chart of the SP500 shows it could have been pricing in a softening US economy in its March price actions. An evening star pattern was formed in the first week of March, and this pattern pushed the index down to a low of 2039.69 before it bounced to a lower high of 2114.86. After the lower high, the SP500 has retraced back toward the March low, but it is still holding above the 2040 level. This could change when trading resume on Monday, since the employment number was reported on Good Friday while the market was closed. If the SP500 reacts to the downside on Monday and breaks below the 2040 support, then the next level to watch will be 1980. If the SP500 fails to hold above the 1980 level, then it probably has broken down from the price channel and has entered into a corrective phase. In this corrective phase, the SP500 could drop to last December’s low near 1820, which represents a drop of 14% from the February high.
Looking at the daily chart, the price actions show a head and shoulder like pattern was formed as the price was trending upward during the first quarter of 2015.
A closer look of the price actions from the 78 minutes intraday chart, it reveals the price held the rising neckline and avoided breaking down from this pattern.
As we drill down to the 30 minutes time frame, the chart reveals a head and shoulder pattern is in the process of forming its right shoulder. By applying a Fibonacci retracement on the swing of the head to the perceived to be a possible right shoulder, the 161% extension could resulted in breaking the 2040 level, and when the price retraced to 261% extension level, the 1980 level will be tested.
If the market is finally ready to have a correction of 10% or more, then the break from the head and shoulder pattern being form on the 30 minutes chart could be the trigger.
As always, expect the unexpected. Whenever the majority of market participants are waiting for the market to take certain actions, the market will rarely abide. This could be one of those incidences when most traders are expecting a correction from the market, and the market could make a head fake by breaking the 2040 level to lure the anxious shorts. After the shorts are in, the market could reverse back above the last December closing high and possibly move to a new all time high. Do not try to anticipate what the market will do. The market tends to punish those that try to anticipate what it will do and reward those that follow what it is doing. Be patient and be defensive!
