The stock market outlook remains in an uptrend this week, but market action turned a bit bearish last week.
2020-06-14-SPX Trendline Analysis - Daily
A big spike in volatility last week, stocks sold off hard. The S&P500 ($SPX) found support at the 200-day moving average. And the upward trendline between the April and May lows remains intact, which is a positive sign for the uptrend.
On the downside, the ADX Directional indicators cross-over, giving us a sell signal. We also picked up 2 distribution days.
2020-06-14-SPX Elliott Wave Analysis - Daily - Intermediate A
The sell-off also changed the Elliott Wave count a bit. One issue with the counts over the past two weeks was the RSI reading. It’s really high, and didn’t show any divergence (higher high price with a lower RSI than the previous high price). Such a strong RSI is typical of a 3rd wave, not a 5th wave. So that reduces the probability of a completed a pattern. That would move us away from the possibility that the S&P completed a minor 5th wave, an intermediate C-Wave, or a Primary B-Wave.
Instead, we're left with a higher probability that the S&P is still in an Intermediate A-wave (the 4th wave to be specific). With that count, we should see a 5th wave head back towards the June high, but with a lower RSI level, which seems likely given the current set-up.
Last week's caveat bears repeating:
Sorry for mentioning you should book some profits last week! We were overdue for a pullback, and the volatility shouldn't be surprising at this point.
Hertz. The company is filing for bankruptcy. That, in and of itself, should keep 100% of investors away from the stock. If you're a speculator or a gambler, by all means.
I heard some say that Hertz is still in business, so it's stock will come back. Yes and no. Yes, there will likely be stock in a company called Hertz after the bankruptcy. No, the shares on the market now are not shares in the new company, and there will not be any type of "conversion" or swap.
Remember what a stock represents: equity. You're buying a share of the company's financial value AFTER all debts are paid. A firm files for bankruptcy when it can't pay it's debts.
A similar situation occurred in 2008 when GM filed for bankruptcy. People piled into their "old" shares, thinking they would get cheap shares of the new company. Wrong. The "old" GM couldn't creditors in full (i.e. people who hold corporate debt, bonds, etc.). Since no equity remained, the stock was worth $0.00. The old "GM" was closed down, and a new "GM" was created, with shares in the "new"company issued during an IPO.
This time is a bit different (worse actually) because Hertz has plans to hold a stock offering, in the old company, while it is filing bankruptcy! This is crazy! Even the disclosure documents say that the new stock will “ultimately be worthless.” (H/T Peter Boockvar via John Mauldin).
Trading is not investing...it's a necessary part, but just a part. If you do decide to speculate, position sizing and stop losses are a must. Don't let one trade wipe you out or add years to your financial goals.
Best to your week!
If you're interested in learning more about the relationship between price and volume, or how to find and trade the best stocks for your growth strategy, check out this book on Amazon via the following affiliate link:
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For the detailed Elliott Wave Analysis, go to the ELLIOTT WAVE lives on by Tony Caldaro.
Once a year, I review the market outlook signals as if they were a mechanical trading system, while pointing out issues and making adjustments. The goal is to give you to give you an example of how to analyze and continuously improve your own systems.
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