This past Thursday morning I sat down with my boss Jim Cramer for just a couple minutes in his office at 14 Wall Street to outline my market view. We both had our concerns. I mentioned that the market structure was similar to 1987, with price bases becoming smaller and smaller as the market has rallied from early October. Jim was concerned about how blaise investors had become about risk and market declines. He threw in an anecdotal comment about one of his daughters buying Beyond Meat (BYND) . Jim started his day over at the floor of the New York Stock Exchange and I went to my desk to whip out several stories about individual stocks.
Cramer continued to discuss risk on Friday's "Mad Money" program, noting that as long as the coronavirus is raging in China, investors need to be prepared for the next shoe to drop. If the experts are right, we still have a lot to worry about.
It's a little-known fact that a full 80% of America's pharmaceuticals originate in China. In the coming weeks, they'll be running out of these drugs, leading to shortages and price gouging. Cramer said this sad state of affairs was shocking to discover and has been building for decades as drug makers favored lower prices over supply chain security. No one ever thought that the Chinese economy could go dark for weeks at a time, but now it is.
Medications are some of the most important imports from China, but the pharmaceutical business certainly is not the only industry that will be hurt as the coronavirus spreads. You can read Cramer's thoughts here on Monday morning.
Let's talk about time and price a bit before the market opens Monday.
In the world of technical analysis, there are three kinds of indicators. Older technical analysts who were mentored or taught by Alan Shaw or Ralph Acampora and others know that price and volume are the two most important pieces of data from the marketplace. Indicators are just derivatives of that price and volume information. Some indicators are leading, such as price momentum. A lot of indicators are coincident, such as the Stochastic Indicator. And we all know about the lagging indicators, which are dominated by moving averages.
Price momentum has been slowing on a few market leaders. We have also seen and pointed out a number of Moving Average Convergence Divergence (MACD) crossovers on individual stocks, telling us that traders should consider some profit-taking. The signs were not everywhere, but they could be found. I am not looking to say "I told you so," but rather to look at what sort of market environment we could be dealing with the next few weeks.
In this daily Japanese candlestick chart of the S&P 500, below, we can see that a reversal was forming last Wednesday -- a spinning top; Thursday -- a hanging man; and Friday -- a bearish candle pattern, for the all-important confirmation. Candles are quick-turning and the vast majority of the patterns are reversals. Candles do not give us price targets like bar chart patterns or Point and Figure charts.
In this daily Point and Figure chart of the S&P 500, below, we can see the long uptrend the broad market has experienced. There is no pattern of distribution (selling) on this chart and no calculated downside price target. The volume-by-price bars (left scale) show heavy activity or volume beginning around 2926. This where accumulation (buying) started and hopefully this is where it should be seen again. This is not a forecast, but an attempt to define the risk the market presents at this juncture in time.
Bottom line strategy: Prices could be under pressure into the middle to latter part of March. In this age of point-and-click transactions and algorithms it is harder to define sentiment and fear; fear is what we should expect at a market low. Keep one eye on the price of gold and another on U.S. Treasuries as they should peak when the fear is the greatest.